How to take care of your retired parents’ finances

In their quest for giving us the best of everything in life, parents often end up neglecting their future. In many cases, children have to step in and rebuild their parents’ corpus to ensure they have a secure future

“There was a sense of complacency after retirement when it came to managing my finances. What with my children settled and me having retired with a sufficiently large corpus, I felt as if it was okay to let go of the steam a little. However, in retrospect, I can vouch that that was a mistake on my part and this illusion of having enough monetary resources led me to be somewhat careless with my investments for a few years. Thankfully my son got a whiff of my disinterested approach towards my finances and stepped in to help me,” narrates Naresh Sinha, a 68-year-old retired government officer based in Bhubaneshwar.

Mutual fund investments in the early years post-retirement can provide significant wiggle room in their later years.

In their quest for giving us the best of everything in life, parents often end up neglecting their future. They leave no stone unturned when it comes to their children but in the process, they often lose sight of being prepared for the post-retirement horizon. In their retirement years, they find that their reservoir isn’t as deep to see them through their sunset years comfortably. In many cases, children have to step in and rebuild their parents’ corpus to ensure they have a secure future.

“When I noticed that my parents were struggling a little financially, I took upon myself the onus of managing their finances. I realized the problem stemmed from their beliefs about money management that is so common among people of their generation – they were content with their retirement corpus being stashed in fixed income instruments. Any investment instrument that carried any element of risk was out of the question. Their perception that since they didn’t have any major goals or obligations left in this stage of life what with me and my sister being married and financially independent made them think actively investing and managing money was not necessary,” narrates Gaurav Sinha, the son of Naresh Sinha who is employed as a management professional in Mumbai.

According to Gaurav, one can start by taking a holistic view of their parents' current investments, income levels, and expenditures and the one-time corpus they may have received on their retirement comprising PF, gratuity, leave encashment, etc. “Taking stock of these things before taking any remedial action is important. The biggest concern after retirement for most people is replacing regular income with income from investments and pensions. If incomes are proving to be insufficient, the focus should be to improve that and you may also have to pitch in if need be,” says Gaurav.

The next step is to calculate whether they have enough savings. “Use an online calculator to check how long your parents’ retirement corpus will last them while factoring in inflation. If you feel that they haven’t saved enough you will have to get down to reworking their portfolio because in all likelihood a major chunk of their savings would be invested in traditional low-yield investment avenues. However, if their savings are enough, then it makes no sense to make structural changes to their portfolio because you may run the risk of going beyond their risk tolerance spectrum.”

While the presence of fixed income instruments is essential for ensuring the element of stability in a retiree’s portfolio, excessive dependence on them hampers wealth creation in the long goal and inflation can quickly deplete their existing retirement corpus. “After doing a deep dive into my parents’ finances, I realised that their portfolio wasn’t upto the mark in terms of generating inflation-beating returns. It is important to have some degree of equity exposure – in accordance with their risk appetites. While low-risk, safer assets will help secure their needs in the medium to the short-term, equity elements will help the portfolio beat inflation and help them maintain the quality of their lifestyles in the long run.”

Preeti Zende, a SEBI registered investment advisor and co-founder of Apna Dhan Financial Services says, “For retirees, the most suitable asset classes are cash, debt, and equities. The allocation of funds in these asset classes helps them tick the boxes of regular income, liquidity, and the need for inflation-hedged returns. For meeting day-to-day expenses and maintaining the safety of capital, some money can be parked in bank accounts, FDs, and liquid funds in the form of emergency funds. If your parents are from a higher tax bracket they can use arbitrage funds to park their money for short-term goals.”

Explaining further as to how children can help parents have a balanced investment strategy, Zende says, “For the safety of capital and regular income, investments in government schemes like Pradhan Mantri Vaya Vandana Yojana, Senior Citizens’ Savings Scheme, Post Office Monthly Income Scheme, and government bonds and bank FDs are advised. But these investments lack in providing inflation hedged returns post-taxes and that is why allocation in equities is a must for retirees. 25 to 30% of the total portfolio should be carved for equities.”

Mutual fund investments in the early years post-retirement can provide significant wiggle room in their later years. They can use the investment to augment their income whenever the need arises through systematic withdrawal plans (SWPs). A Systematic Withdrawal Plan (SWP) is a facility that allows investors to withdraw money from an existing mutual fund at predetermined intervals. Thus this can help them maintain a regular source of income.

Zende says, “You can help your parents identify good quality equity mutual funds. A combination of hybrid funds, index, balanced and flexicap funds are advisable for them. However, they should avoid small cap, sectoral or thematic funds as it may lead to a concentration of risks in their portfolios.”

Action points

• Skyrocketing healthcare costs can be the biggest impediment to your parents’ financial well-being in their post-retirement years. Make sure that they have adequate health coverage so that their savings do not take a hit in the event of health emergencies.
• Your parents should be fully privy to all the documents pertaining to their investments and assets. The lack of knowledge about investments and assets can leave one of them particularly vulnerable in the event of the sudden death of their spouse.

This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.