Tips to lower financial stress when your parents are retiring
Taking care of parents in their old age is not just a financial but
also an emotional issue. You can't ignore either. Lastly, how you deal
with your parents' retirement will be a learning experience that you can
use to plan your own retirement.
It might have passed as a non-event, for you were preoccupied with life, career and family. Retirement of parents can come quietly, without stirring your finances. Or, it may throw up many questions with a long-term bearing on your budget, investments and sundry other financial matters.
Your parents ended their working years with a big fund, a home and dream of living comfortably. Life, though, can be cruel. Old age comes with its share of problems-diseases, faster-than-expected erosion of wealth, children fighting for financial legacy, etc.
These can be a drain on your finances too if you do not plan in advance.
Taking care of parents in their old age is not just a financial but also an emotional issue. You can't ignore either. Lastly, how you deal with your parents' retirement will be a learning experience that you can use to plan your own retirement.
As we talked about the possibility of parents' retirement throwing up tough questions, here are a few questions whose answers may help you plan your finances in a better way.
HAVE THEY SAVED ENOUGH?
A lot depends upon the answer to this question. If you have access to the internet and patience to look for a retirement fund calculator, it's easy to see if your parents have saved enough to last their post-retirement life.
Find out if they have saved enough. If not, see if they have time to reach the goal. Is yes, increase savings, if necessary, and invest a part of the funds in risky instruments such as equities that can give higher returns. You also need to brace yourself for extra savings to support your parents in later stages of their life.
DO THEY HAVE HEALTH COVER?
Health could be your parents' biggest expense after retirement. Given the sharp rise in health costs (15-20% a year), it is likely that a lot of money will go towards medical expenses as your parents age.
If your parents have health insurance, they have saved you and themselves many hassles. This is because few insurers are happy to cover people after they cross the age of 50.
"Each insurance company goes by its underwriting principles and uses discretion to accept or reject a particular risk. Generally, insurers reject applications when they find that the applicant's health is adverse with respect to their underwriting guidelines," says Antony Jacob, chief executive officer, Apollo Munich Health Insurance.
But can you include them in your family floater policy? Yes, but doing so will increase costs substantially, as premiums for family floater plans are based on the age of the oldest family member. Besides, many insurers do not cover parents who are more than 65 years old in family floater plans.
But there is a way out. Many health insurance companies have special plans for senior citizens. These usually provide cover for life, but are very expensive.
"If your parents do not have health insurance, they can buy a policy for senior citizens. It may be expensive but will be worth it," says Suresh Sadagopan, a certified financial planner and founder, Ladder7 Financial Advisors.
For senior citizens, the cover should be on the higher side. So, buy each parent an individual cover of Rs 3-5 lakh and add a top-up cover of up to Rs 10 lakh.
A cover of Rs 5 lakh for a 60-year-old will cost between Rs 17,000 and Rs 29,000 a year.
You can claim income tax deduction up to Rs 20,000 if you are paying premium for your parents' (if they are above 60) health insurance. This is besides the Rs 15,000 deduction for premium paid to cover self, wife and children. This means you can claim tax deduction up to Rs 35,000 every year on account of health insurance alone.
You must also build an emergency fund to take care of your parents' medical needs.
ARE THEY INVESTING WISELY?
The two factors that must decide where the retirement money is invested are regular income and safety. Also, it makes sense to ensure that the tax outgo is reduced as much as possible.
Monthly income scheme/plans: If your parents' pension does not cover their expenses, they can invest a part of the retirement fund in monthly income schemes (MIS) of banks and post offices. These offer guaranteed monthly income, unlike mutual funds' monthly income plans (MIPs), which do not guarantee regular monthly dividends. The post office MIS is offering 8.4% interest at present.
"The immediate impact of retirement is on monthly income. Analyse whether parents' expenses can be met by their existing investment plans, pension plans and assets. If not, you can look at MIPs or post office MIS," says Mahesh Tadepalli, financial advisor and head of research, Arthayantra.
Life insurance annuity products: These give regular income. You invest a lump sum with an insurer, which pays you according to the existing rate of return. The payment frequency can be monthly, quarterly or yearly. The rates are benchmarked to medium- to long-term government bonds.
Senior Citizen Savings Scheme (SCSS): It is for people who are at least 55 years old. It can be another source of regular income, though interest payments are quarterly. The present rate of return is 9.2%. It keeps changing according to the interest rates in the broader market. The maximum amount that can be invested in the SCSS is Rs 15 lakh. The tenure is five years, extendable up to three years.
While life insurance annuities and the SCSS offer tax deduction benefits under Section 80C, their returns are not tax-free. Interest earned from post office MIS, SCSS and annuity schemes is clubbed with income and taxed, while dividend from MIPs is taxed at 25%.
The remaining funds can be invested in safe instruments such as bank fixed deposits, public provident fund, tax-free bonds and debt funds.
Life insurance: If your parents have life insurance plans, get rid of them. They do not need life cover as they don't have big financial liabilities at this stage.
"Parents usually have no financial responsibilities and have sufficient money to take care of their postretirement needs in the form of pension or a big corpus. If this is the case, they should get rid of their life insurance policies. Instead, they should increase the medical cover," says Shilpi Jain, a certified financial planner.
You must also ensure that they do not invest their retirement funds in life insurance products due to reasons mentioned earlier. This is because investments in insurance products are illiquid and have long tenures.
In fact, if you have to support your parents after retirement, you will have to factor in that cost. This necessarily means increasing your life cover.
"If you have to support your parents after their retirement, you should include that amount in your expenses and then decide how much life cover you need," says Pankaj Mathpal of Optima Money, a financial planner.
SHOULD THEY INVEST IN EQUITIES?
It depends upon their risk appetite. The size of the fund and income after retirement are also factors to be kept in mind while investing in shares.
According to Jain, if the retirement fund is the only source of income, it should be invested in instruments that protect the principal and are liquid.
Arvind A Rao, a certified financial planner and founder, Dreamz Infinite Financial Planners, says they advise retired clients to have equity exposure only through MIPs and balanced funds. "Equities bring uncertainty and we prefer to keep that to the minimum," he says.
MIPs usually invest 70-80% money in debt and the rest in equities, while balanced funds invest at least 65% in equities.
However, it is equally important to beat inflation, or the retirement fund will lose its purchasing power. A part of the fund that is to be used in the later part of the retirement life can be invested in large-cap mutual funds, exchange-traded funds or balanced funds.
Sumeet Vaid, founder and CEO, Ffreedom Financial Planner, says money that is to be used in the first five years after retirement must be invested in a completely conservative portfolio (100% debt). "We can be a little aggressive with money that is required later in life," says Vaid.
WHAT IF THEY WANT TO LIVE SEPARATELY?
If your parents have their own house and earn enough, this may not impact you financially. However, you may have to ensure that the place where they decide to stay is safe, has a low crime rate, is easily accessible, and has good medical facilities.
If your parents have enough money to buy a retirement home or a house in projects for the old, they can go for these, as they are built keeping in mind the needs of senior citizens.
Such a house can cost anything between Rs 25 lakh and Rs 1 crore. However, retirement homes are not an ideal investment, as only people above 55 years can stay in these projects. Even after your parents' death, you can inherit the house but cannot stay in it till the time you touch 55.
However, if they have their own home but insufficient income, and still want to stay separately, you will have to spare a fixed amount from your income to support them. You will have to factor in this cost to arrive at the life insurance cover for you. Or, they can rent a part of the house to augment their income.
WHAT IF THEY ARE FALLING SHORT OF TARGET?
In such a case, you will have to support your parents, which will be an additional financial burden on you. Your savings and investments will fall and you may have to pay extra to increase your life cover (as your parents are now financially dependent on you). Health-care costs of parents will pinch you further.
Irrespective of the additional burden, this is one responsibility you cannot run away from. However, smart and pragmatic thinking can ease the pressure to an extent.
Shift to smaller towns:
If your parents are living in metros or Tier-I cities, they can shift to a smaller town, where the cost of living will be lower. One can find several good options such as Jaipur, Agra and Dehradun which are near Delhi. Similarly, those living in Mumbai can shift to places like Pune and Kalyan.
Work for a few more years:
Either or both your parents can work for a few more years if they are in good health. Nowadays there are multiple avenues for those who want to continue working after retirement. They can take up consultation work or go into teaching. They can also start distributing financial products. Other options include blogging and joining social enterprises such as NGOs.
Invest in high-risk instruments:
Ask your parents to invest a part of their fund in higher risk instruments such as equities. They can keep the money that is to be used in the first five-eight years in debt and invest the rest in hybrid instruments such as MIPs and balanced funds. A small portion can be put in exchange-traded funds. This will generate returns higher than the inflation rate and shield the corpus from capital gains tax.
Reverse mortgage property:
If your parents have a property, they can reverse mortgage it to a lender. The bank, based on the value of the property, will pay them a fixed amount for 20 years. Since this amount is treated as a loan, there is no tax liability. Besides, the parents can stay in the house till they are alive.
"One can also take a lump-sum amount at the start of the mortgage period in case of a medical emergency or to pay off a debt and take the balance in monthly instalments," says Sumeet Vaid of Ffreedom Financial.
After your parents are no more, you can pay off the loan and reclaim the property. Else, the bank can sell it in the open market.
WHAT IF YOUR PARENTS RETIRE WITH A HUGE LOAN?
If your parents retire without closing a housing loan, weigh the options available. One option is to pay off the loan with a part of the retirement fund. Else, they can continue to pay equated monthly instalments if they can. In return, you can support them till they pay off the loan.
If the debt is too large, see if they have a spare property which they can sell and use the proceeds to clear the debt. Reverse mortgage is also an option, as it offers a lump sum at the start of the mortgage period.
DO THEY/YOU HAVE A WILL?
Imagine a situation where out of the two parents, only the father is alive, and he, too, is dependent on you. If you happen to pass away without a will, as per the Hindu Succession Act, your property will pass on to Class 1 heirs-spouse, children and mother of the deceased. Now, what if your wife and children, who get your property, refuse to take care of your father?
This shows that not just your parents but you also need to have a will to ensure that your wealth goes to the right people after your death.
A will ensures that wealth is smoothly passed on to the desired people without legal hassles. "If an individual has assets that he/she would like to pass on to heirs, preparing a will is one of his/her foremost responsibilities," says Sumit Vaid of Ffreedom Financial.
NOT A NON-EVENT AFTER ALL
By now you must have realised that retirement of your parents is going to impact you as well. The financial impact may be mild or big, but you have to be ready to face any situation.
While helping them with their finances, you should bear it in mind that you are just assisting them and, therefore, should not force your wishes on them. These are golden years for them and it's best to let them have their share of fun.
Your parents ended their working years with a big fund, a home and dream of living comfortably. Life, though, can be cruel. Old age comes with its share of problems-diseases, faster-than-expected erosion of wealth, children fighting for financial legacy, etc.
These can be a drain on your finances too if you do not plan in advance.
Taking care of parents in their old age is not just a financial but also an emotional issue. You can't ignore either. Lastly, how you deal with your parents' retirement will be a learning experience that you can use to plan your own retirement.
As we talked about the possibility of parents' retirement throwing up tough questions, here are a few questions whose answers may help you plan your finances in a better way.
HAVE THEY SAVED ENOUGH?
A lot depends upon the answer to this question. If you have access to the internet and patience to look for a retirement fund calculator, it's easy to see if your parents have saved enough to last their post-retirement life.
Find out if they have saved enough. If not, see if they have time to reach the goal. Is yes, increase savings, if necessary, and invest a part of the funds in risky instruments such as equities that can give higher returns. You also need to brace yourself for extra savings to support your parents in later stages of their life.
DO THEY HAVE HEALTH COVER?
Health could be your parents' biggest expense after retirement. Given the sharp rise in health costs (15-20% a year), it is likely that a lot of money will go towards medical expenses as your parents age.
If your parents have health insurance, they have saved you and themselves many hassles. This is because few insurers are happy to cover people after they cross the age of 50.
"Each insurance company goes by its underwriting principles and uses discretion to accept or reject a particular risk. Generally, insurers reject applications when they find that the applicant's health is adverse with respect to their underwriting guidelines," says Antony Jacob, chief executive officer, Apollo Munich Health Insurance.
But can you include them in your family floater policy? Yes, but doing so will increase costs substantially, as premiums for family floater plans are based on the age of the oldest family member. Besides, many insurers do not cover parents who are more than 65 years old in family floater plans.
But there is a way out. Many health insurance companies have special plans for senior citizens. These usually provide cover for life, but are very expensive.
"If your parents do not have health insurance, they can buy a policy for senior citizens. It may be expensive but will be worth it," says Suresh Sadagopan, a certified financial planner and founder, Ladder7 Financial Advisors.
For senior citizens, the cover should be on the higher side. So, buy each parent an individual cover of Rs 3-5 lakh and add a top-up cover of up to Rs 10 lakh.
A cover of Rs 5 lakh for a 60-year-old will cost between Rs 17,000 and Rs 29,000 a year.
You can claim income tax deduction up to Rs 20,000 if you are paying premium for your parents' (if they are above 60) health insurance. This is besides the Rs 15,000 deduction for premium paid to cover self, wife and children. This means you can claim tax deduction up to Rs 35,000 every year on account of health insurance alone.
You must also build an emergency fund to take care of your parents' medical needs.
ARE THEY INVESTING WISELY?
The two factors that must decide where the retirement money is invested are regular income and safety. Also, it makes sense to ensure that the tax outgo is reduced as much as possible.
Monthly income scheme/plans: If your parents' pension does not cover their expenses, they can invest a part of the retirement fund in monthly income schemes (MIS) of banks and post offices. These offer guaranteed monthly income, unlike mutual funds' monthly income plans (MIPs), which do not guarantee regular monthly dividends. The post office MIS is offering 8.4% interest at present.
"The immediate impact of retirement is on monthly income. Analyse whether parents' expenses can be met by their existing investment plans, pension plans and assets. If not, you can look at MIPs or post office MIS," says Mahesh Tadepalli, financial advisor and head of research, Arthayantra.
Life insurance annuity products: These give regular income. You invest a lump sum with an insurer, which pays you according to the existing rate of return. The payment frequency can be monthly, quarterly or yearly. The rates are benchmarked to medium- to long-term government bonds.
Senior Citizen Savings Scheme (SCSS): It is for people who are at least 55 years old. It can be another source of regular income, though interest payments are quarterly. The present rate of return is 9.2%. It keeps changing according to the interest rates in the broader market. The maximum amount that can be invested in the SCSS is Rs 15 lakh. The tenure is five years, extendable up to three years.
The remaining funds can be invested in safe instruments such as bank fixed deposits, public provident fund, tax-free bonds and debt funds.
Life insurance: If your parents have life insurance plans, get rid of them. They do not need life cover as they don't have big financial liabilities at this stage.
"Parents usually have no financial responsibilities and have sufficient money to take care of their postretirement needs in the form of pension or a big corpus. If this is the case, they should get rid of their life insurance policies. Instead, they should increase the medical cover," says Shilpi Jain, a certified financial planner.
In fact, if you have to support your parents after retirement, you will have to factor in that cost. This necessarily means increasing your life cover.
"If you have to support your parents after their retirement, you should include that amount in your expenses and then decide how much life cover you need," says Pankaj Mathpal of Optima Money, a financial planner.
SHOULD THEY INVEST IN EQUITIES?
It depends upon their risk appetite. The size of the fund and income after retirement are also factors to be kept in mind while investing in shares.
According to Jain, if the retirement fund is the only source of income, it should be invested in instruments that protect the principal and are liquid.
MIPs usually invest 70-80% money in debt and the rest in equities, while balanced funds invest at least 65% in equities.
However, it is equally important to beat inflation, or the retirement fund will lose its purchasing power. A part of the fund that is to be used in the later part of the retirement life can be invested in large-cap mutual funds, exchange-traded funds or balanced funds.
Sumeet Vaid, founder and CEO, Ffreedom Financial Planner, says money that is to be used in the first five years after retirement must be invested in a completely conservative portfolio (100% debt). "We can be a little aggressive with money that is required later in life," says Vaid.
WHAT IF THEY WANT TO LIVE SEPARATELY?
If your parents have their own house and earn enough, this may not impact you financially. However, you may have to ensure that the place where they decide to stay is safe, has a low crime rate, is easily accessible, and has good medical facilities.
If your parents have enough money to buy a retirement home or a house in projects for the old, they can go for these, as they are built keeping in mind the needs of senior citizens.
Such a house can cost anything between Rs 25 lakh and Rs 1 crore. However, retirement homes are not an ideal investment, as only people above 55 years can stay in these projects. Even after your parents' death, you can inherit the house but cannot stay in it till the time you touch 55.
However, if they have their own home but insufficient income, and still want to stay separately, you will have to spare a fixed amount from your income to support them. You will have to factor in this cost to arrive at the life insurance cover for you. Or, they can rent a part of the house to augment their income.
WHAT IF THEY ARE FALLING SHORT OF TARGET?
Irrespective of the additional burden, this is one responsibility you cannot run away from. However, smart and pragmatic thinking can ease the pressure to an extent.
Shift to smaller towns:
If your parents are living in metros or Tier-I cities, they can shift to a smaller town, where the cost of living will be lower. One can find several good options such as Jaipur, Agra and Dehradun which are near Delhi. Similarly, those living in Mumbai can shift to places like Pune and Kalyan.
Work for a few more years:
Either or both your parents can work for a few more years if they are in good health. Nowadays there are multiple avenues for those who want to continue working after retirement. They can take up consultation work or go into teaching. They can also start distributing financial products. Other options include blogging and joining social enterprises such as NGOs.
Invest in high-risk instruments:
Ask your parents to invest a part of their fund in higher risk instruments such as equities. They can keep the money that is to be used in the first five-eight years in debt and invest the rest in hybrid instruments such as MIPs and balanced funds. A small portion can be put in exchange-traded funds. This will generate returns higher than the inflation rate and shield the corpus from capital gains tax.
Reverse mortgage property:
If your parents have a property, they can reverse mortgage it to a lender. The bank, based on the value of the property, will pay them a fixed amount for 20 years. Since this amount is treated as a loan, there is no tax liability. Besides, the parents can stay in the house till they are alive.
"One can also take a lump-sum amount at the start of the mortgage period in case of a medical emergency or to pay off a debt and take the balance in monthly instalments," says Sumeet Vaid of Ffreedom Financial.
After your parents are no more, you can pay off the loan and reclaim the property. Else, the bank can sell it in the open market.
If your parents retire without closing a housing loan, weigh the options available. One option is to pay off the loan with a part of the retirement fund. Else, they can continue to pay equated monthly instalments if they can. In return, you can support them till they pay off the loan.
If the debt is too large, see if they have a spare property which they can sell and use the proceeds to clear the debt. Reverse mortgage is also an option, as it offers a lump sum at the start of the mortgage period.
DO THEY/YOU HAVE A WILL?
Imagine a situation where out of the two parents, only the father is alive, and he, too, is dependent on you. If you happen to pass away without a will, as per the Hindu Succession Act, your property will pass on to Class 1 heirs-spouse, children and mother of the deceased. Now, what if your wife and children, who get your property, refuse to take care of your father?
This shows that not just your parents but you also need to have a will to ensure that your wealth goes to the right people after your death.
A will ensures that wealth is smoothly passed on to the desired people without legal hassles. "If an individual has assets that he/she would like to pass on to heirs, preparing a will is one of his/her foremost responsibilities," says Sumit Vaid of Ffreedom Financial.
NOT A NON-EVENT AFTER ALL
By now you must have realised that retirement of your parents is going to impact you as well. The financial impact may be mild or big, but you have to be ready to face any situation.
While helping them with their finances, you should bear it in mind that you are just assisting them and, therefore, should not force your wishes on them. These are golden years for them and it's best to let them have their share of fun.
