28 Sep 2015 19:32 IST

Taking care of mom and dad

Here's how you can help your retired parents manage money and build a tidy nest egg

Are your parents retired and living by themselves? You already know that cognitive ability declines with age. So, you may want to protect your retired parents from individuals who unscrupulously sell inappropriate financial products.

You may also want to prevent your parents from making inappropriate investment decisions in an attempt to self-manage their money. In this article, we discuss steps you should take to reduce the possibility of your retired parents making inappropriate decisions or being victims of fraud.

Automatic processes

You should help your parents with their investments when they are transitioning from their working life to retired life. During their working life, your parents would have accumulated savings in their retirement portfolio. At retirement, this portfolio needs a complete makeover.

In the absence of active income, post-retirement, your parents need to withdraw money from their investment portfolio to sustain their lifestyle. Hence, this post-retirement portfolio is called retirement income portfolio. What should you do to help your parents?

At the minimum, your parents need money to meet living expenses and healthcare costs. Consider living expenses.

You should invest an appropriate amount of money in monthly income bank deposits to generate cash flows to meet your parents’ regular living expenses.

You could invest in deposits with the longest maturity; that way you do not have to renew them often. You could also choose automatic renewal. But you should check with the bank if they charge premature withdrawal penalty in case they need to withdraw the deposit before its maturity.

As for your parents’ healthcare costs, pay attention to three important elements — emergency fund, medical insurance and high-cost surgeries. So, first you should ensure that your parents have a decent medical insurance coverage.

Then, make sure they have ₹2-2.5 lakh in an emergency fund, or about six times their monthly living expenses, whichever is higher.

This money can be kept in a savings bank account for ease of operation. But ensure that your parents operate the ATM at least once a month. Importantly, only you and your parents should know the password for the ATM (debit) card. Every investment portfolio needs exposure to equity. Your parents’ equity investment capital for their retirement income portfolio will come from their retirement portfolio.

You can make equity investments easy for your parents by doing lumpsum investment, or by making systematic investments in equity funds over two years. Alternatively, you could carry over the equity investments from their retirement portfolio onto their retirement income portfolio.

Investment adviser

Lastly, impress upon your parents that they need to discuss with you each time they want to make fresh investments. Alternatively, you could hire an investment adviser to manage your their retirement income portfolio.

You should then consider two factors. First, hire a fee-based adviser who can confidently give investment recommendations. One way to gauge your adviser’s conviction is to ask if he/she buys the investment products that are being recommended.

Importantly, beware of distributors who offer investment advice! Distributors may want to sell products that generate higher commission.

Second, ensure that the adviser discusses fresh investments or rebalancing of portfolio with you. This will make you continually aware of your parents’ investments and ensure that the actions of the investment adviser are aligned with your parents’ post-retirement goals.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

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