Managing finances for your parents – avoiding age-old tropes
In the quest to give children the best of everything that life has to offer, our parents leave no stone unturned - be it the best educational credentials, catering to the occasional outlandish demands or ensuring the best facilities for a wholesome childhood and adolescence. However, sometimes, in this journey of providing for their children, many parents end up jeopardizing their future.
Depleted income streams post retirement and lack of sufficient savings and investments is a common problem in the 60 plus demographic in India. In fact, according to a survey conducted by Agewell Foundation in 2018, only one-third of the elderly population in India feels “financially secure”, with a majority (41.43 per cent) citing pension/family pension as its main source of income, followed by interest on savings or rent from property.
Given such circumstances, managing the parents’ finances as well as lending them financial support becomes a responsibility for their children. Taking over the reins of your parents’ finances, especially if it happens all of a sudden can be challenging, more so if your parents' attitudes towards money management is diametrically opposite to that of yours.
Paresh Saxena, a 45-year-old entrepreneur based in Kolkata has been handling his parents' finances for the last few years. Elaborating on the challenges he faced initially, he says, “My parents belong to a generation that has had to fight tooth and nail for even getting the bare necessities in life. The experience of having no safety net that they had in their formative years is something they will never be able to forget for no fault of theirs. Consequently, their approach to money management has always been heavily coloured by fear and cynicism.”
Saxena narrates that when his parents expressed that they wanted him to take over their financial management duties, he had to sit with them a couple of times and make them understand that the world of investing had changed and they need not feel anxious to move beyond their comfort zone. “My parents’ investment journey has been limited to traditional asset classes – the usual mix of fixed deposits, gold and real estate. They have always been skeptical of instruments that carry an element of risk. When I told them they should let me invest in equity mutual funds, eyebrows were raised but with time I could help them gain the conviction that the age-old investment formulas need to be changed now,” Saxena narrates.
The other factor that has made it essential for the parents’ generations to wean away from the familiar pastures of fixed deposits and savings schemes is that lifestyle standards have significantly inched upwards over the years. Add skyrocketing healthcare costs to the mix and many find themselves in situations where they are forced to pinch pennies. In such cases, it is imperative to get a minutely detailed picture of their finances, advises Saxena. “When you manage your parents finances, it's not just about picking assets without giving in to their preferences which may be dated or erroneous in these times. It also entails delving into their day-to-day expenses, spending patterns, EMIs and the likes. They may be used to spending on items which may be unnecessary or they may not be aware of cheaper alternatives. This is something that needs to be touched upon by children who manage their parents’ finances,” he says.
Preeti Zende of Apna Dhan Financial Services says, “Our parents may retire with a sizable amount but they fail to acknowledge the importance of investing that kitty wisely as very few retirees are blessed to have pensions. Also, with galloping retail inflation, they cannot simply rely on bank FDs to park their money. Even during their retirement days, the main focus is always on protecting the capital but it doesn't mean all their money should be locked in such products which are not only taxable but do not generate inflation-hedged returns either.”
Zende advises opting for the ‘bucket strategy’ when drafting money management strategies for parents. According to this strategy, the kitty can be divided into three buckets – short-term, medium term and long term. “For the short term, you should draw an estimate of your parents’ expenses for the next two years and according to the estimate, invest a proportionate amount in debt mutual funds. By investing in ultra short term debt funds and liquid funds and then starting SWP(Systematic withdrawal) can help them get regular income and also reduce their tax liabilities,” she suggests.
Zende says for the medium term, investing in government floating bonds as well as hybrid equity funds can be a wise move. She adds, “There are two types of hybrid equity funds - one is the conservative hybrid fund and another is aggressive hybrid fund. You may go with either of it or both based on your parents' risk taking ability. For the long term, you can consider exposure to pure equity mutual funds, 25-30% of the portfolio can be invested in equity mutual funds keeping a 12+ years horizon. Here you can invest in Index funds, good quality flexicap and some exposure in large and mid cap mutual funds.”
1. Healthcare expenses are a real concern when it comes to ageing parents. Get them adequate insurance coverage if they don’t have one already.
2. Always keeping them in the loop about how you are managing their finances is sacrosanct. Never forget to document all your actions so that you are prepared to answer their questions at all times and not let doubts fester in their minds.
3. For the short term, you should draw an estimate of your parents’ expenses for the next two years and according to the estimate, invest a proportionate amount in debt mutual funds. By investing in ultra short term debt funds and liquid funds and then starting SWP(Systematic withdrawal) can help them get regular income and also reduce their tax liabilities.
4For the medium term, investing in government floating bonds as well as hybrid equity funds can be a wise move.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund.