Most BudgetBakers customers are still pretty young; between the ages of 22 and 38, but the same cannot always be said for their parents, many of whom are now in their twilight years.
The baby boomer generation, born between about 1946 and 1964, are starting to enter retirement in large numbers, with about 10,000 retiring every day in the United States, and with similar numbers doing the same in Europe. The majority of this generation will be in their 70s by the end of the decade, and those are the years when cognitive decline is most likely to begin.
As they enter retirement, our parents will face new challenges, health and finance related. As they do, our roles in their lives may change significantly, as we take on more responsibility for making sure they are safe and financially secure. Retirees typically live on a fixed income, which makes financial literacy and planning essential to their comfort and health.
So here are 10 tips to ensure your parents are financially secure in the future.
1. Start Early: Setting the Foundation
It’s important as our parents near retirement, to begin planning for this major change in their financial situation. Talking to your parents about their finances may be embarrassing or difficult, as they will have spent most of their lives as the “responsible” party in your family. But times and circumstances shift: you’ll have to take small steps to changing this relationship so that your parents are more open both to talking about their finances, and taking advice and giving up some degree of control over their lives.
Get a picture of your parent’s finances. Ask how much they have saved, how much they will receive from pensions or social security, and what their needs will look like during retirement. By talking through these issues in advance, you’ll ensure that there are no nasty surprises when the time comes for your parents to retire. Some warning signs to look out for are:
- Excess consumer debt, like credit cards, home equity lines of credit, car loans, or student loans (less some seniors still have student loans to pay off).
- Large mortgage balances, meaning that your parent continues to owe a large amount on their existing home loans.
- A high level of discretionary spending, such as on eating out, clothing, traveling, country club dues, or online subscriptions
- Upcoming major repairs to their home or property
By addressing these issues early on, you will make sure that your parents are living within their means, particularly as their financial situation will change when they retire, and no longer draw a salary. While it can be very hard to discuss budgeting with your parents, being aware of their spending habits and lifestyle needs will help you to influence their decisions at retirement. Making sure that your parents eliminate excess debt and spending will ensure they’re secure on a fixed income.
2. Communication is two-way!
Remember that your parents are probably used to being the “adult” in your relationship, even if you now have a family of your own. They may be used to “treating” you and any grandchildren, and you may have relied more on them in your early adult years for help with large expenses or unexpected problems.
You can return this favor by starting to take responsibility for your own expenses, and making it clear that you no longer need the kind of financial support you once did. By setting a good example, you will help your parents to know that they can safely attend to their own future needs without worrying about their children and grandchildren as much. Making this transition won’t be easy, but the earlier you start, the easier it will be.
Making sure you don’t rely on your parents for financial support is essential to making sure that they are focused on their own needs. Listen to their concerns, and express your own in frank but loving terms, so that your parents feel that you’re working together to a common goal: a secure and happy retirement.
3. The 4% Rule: Setting a Realistic Budget
Once you have a picture of your parent’s income, it’s important to plan for a realistic budget that they will be able to follow without too much stress. Difficult decisions may be ahead. Do your parents need to think about selling their home and finding something more affordable? Or perhaps it’s time for them to live with your family? Each family’s situation will be unique, but the point is that change is usually inevitable.
Typically, assuming that your parents have invested wisely and own their own home, they will be able to expect to spend about 50% of their former working income during retirement. For many seniors, that does mean a reduction in their spending, which usually comes from not spending as much on transportation, travel, personal devices, and other things related to an active career. If your parents plan to continue working in some capacity, this may change the outlook, but generally seniors see a reduction in their expected income.
Many financial advisors recommend that you should withdraw no more than 4% of your total retirement savings in the first year of retirement, and try to maintain that level of draw-down, adjusting for inflation over time. This gives your parents’ savings and investments time to grow and sustain their income in the future. If that doesn’t seem achievable with their present means, then radical changes in their lifestyles or living circumstances may be necessary.
4. Get Shopping Under Control
In this age of next-day free deliveries and online shopping, depending on where you live, your parents may overspend on things that aren’t really needed, just because of the convenience of online shopping.
For many people, especially of a certain generation, the act of shopping is soothing, and represents their power and personal agency to make decisions for themselves. An amazon delivery might be the reason to get up in the morning and get dressed. A shopping network might have phone lines staffed with nice people who remember your parents’ name and personal details. There is an entire industry built around the shopping habits of senior citizens, and this is one of the major growing problems when it comes to managing senior finances.
Don’t grab the remote out of your parent’s hands, and don’t take away their Amazon prime subscription. At least not right away. But talk to your parents about how much they spend on unnecessary shopping, and why they do it. For some, it’s just a habit. For others, it speaks to a loneliness or a need to feel in control of their lives. By addressing those issues in an intelligent way, you can help safeguard your aged parents from financial mistakes like over-spending on chotchkies and knicknacks.
5. Manage Healthcare Costs
While you’re hammering out a budget, don’t forget that your parent’s healthcare costs will be one of the things that is likely to increase as they age. If you live in a free universal healthcare territory, that’s terrific, but if you don’t, make sure you’re aware of your parent’s healthcare obligations, and plan with the expectation that their healthcare costs will rise as they age.
Healthcare means more than going to the doctor: it’s best to plan for things like physical therapy, personal trainers, and other “optional” services that your parents may end up needing as they get older. While other areas of spending may decrease, health spending overall tends to increase as we age, which puts a strain on a senior’s budget.
6. Make Housing Decisions Early
Speaking of expenses that increase over time: owning a home is expensive. In some places, property taxes are sky high, and will only increase as inflation drives home prices higher. That added home equity might have helped sustain your parent’s lifestyles in the past, but as seniors, their ability to borrow against their home equity will be diminished as their income dwindles.
Look at your parents’ housing situation carefully. Does their house need a new roof? Are their condo fees or Home Owners Assocation (HOA) fees rising consistently? Your parents will have to face those rising costs during a time when they can ill afford it. With climate change impacting more and more people, weather events become more extreme, and home modifications may become more important and more expensive. Energy costs and water access may also change in the future.
And that’s just the macro-economic situation. Your parents will face safety and accessibility needs in the future that may necessitate modifications or additions to the house. Assess what can be done today to make their home more accessible, or consider the comparative costs of having to move somewhere else later on.
The older a senior citizen is, the more traumatic a large move can be. Research has long showed that mortality rates increase when a senior moves, either to a smaller home or an assisted living facility. That’s even more true for those who are widowed or unmarried. Each time a senior moves, mortality rates increase over the following 12 months, meaning that having to move repeatedly puts your parents at increased risk of an early death each time.
That’s why it’s so important to assess not only where your parents can live sustainably, but for how long they can stay there. If they expect to have to move to an assisted living or retirement community, then earlier is better. Their chances of living a long and healthy retirement increase if they settle their housing issues early on. That will not only increase their quality of life, but save their finances in the bargain.
7. Optimize Social Security Benefits
Each country has its own social security system, and each individual has made differing contributions to that system during their lifetime. It’s important to make sure that your parents benefit as much as possible from your social security system, by understanding what the benefits are, and making sure they’ve gotten all they can from it.
If your parents are still working age, inquire about things like their expected retirement age, their voluntary contributions to retirement or benefits schemes, and other details. Make sure that if they can afford it, they are contributing as much as possible to these programs while they’re still working. It may mean a slight decrease in their available income now, but it will pay off for the rest of their lives.
In some careers, and with some employers, there are incentives for workers to retire early. For example, a teacher may be offered early retirement in exchange for a slightly decreased pension payout, but their social security may pick up that slack. Sometimes public employees are offered incentives to retire early as a means of avoiding layoffs. It pays to stay informed and talk openly with your parents about their employer’s plans for their retirement.
8. Talk About Long Term Care Insurance
Nobody wants to imagine the worst, but the fact is that one or both of your parents may require long term nursing or assisted living with in-home carers. Otherwise healthy seniors can suffer strokes, auto-immune disease, heart disease, cancer, or dementia.
Long term care insurance is a form of insurance that pays out when your parent requires indefinite support from an assisted living facility or a live-in caregiver. This type of insurance may seem expensive, but its nothing in comparison with the costs you might face if your parent needs this kind of care over a period of years. Assisted living can easily cost more than the median salary in many places, making it unaffordable for all but the highest earners, so insurance can help shoulder that burden.
Government programs like Medicaid in the US may help cover some of these costs, but you may find that the level of care is not as high as you would like. Or, you may find that these programs don’t really cover all of the associated costs of long term care. It’s likely that these are expenses you may one day face.
The earlier your parent begins paying for this type of insurance, the better the coverage can be for the price.
9. Take Advantage of Senior Discounts
Ok, getting old can’t be all bad. There are always senior discounts to consider!
It’s amazing the variety of things seniors can do on the cheap: from ocean cruises to going to the movies, seniors can get discounts on all kinds of things, be they public or private services. Associations like AARP in the US regularly promote huge discounts on food, travel, online services, and other exclusive offers. Your parents can join these organizations as early as age 50, and begin taking advantage of many discounts by the time they’re 60.
Keep in mind also that other expenses like mobile phone service, tv licenses, public transit tickets, and more are free or reduced for seniors. Yet not all seniors apply for these discounts or know about them. You may have parents who scour the internet for discounts on everything, or you may have parents who are too proud to ask for “handouts” in the form of a two-for-one early bird special. Find out which they are, and make sure they’re getting all they deserve.
Seniors in America, for example, can get free transportation, free meals in restaurants, free access to online books and library resources, free bank accounts, and even college classes in some places. Food banks and book repositories usually are open to seniors, regardless of income. Publicly supported services such as Kanopy work with local libraries to provide free streaming content to library subscribers. You can check the AARP website for more deals than you could possibly imagine.
Being old sounds amazing, when it comes to discounts.
10. Don’t Go It Alone: Use Family Resources
Dealing with the change in your relationship with your parents can be tricky, particularly if they’re very independent people. Often seniors will “play favorites,” by picking one of their children to confide in, and locking the others out of decision making. That can be both a blessing and a curse: you might be happy not to have to deal with your parent’s life decisions, but your siblings or other family members may not have the energy or knowledge needed to help your parents.
Having family meetings with the siblings, or aunts and uncles, and with your parents, might help establish the pecking order as to questions of who is responsible for your parents and their financial and lifestyle decisions. The key is to have open communication, so that none of you feel that the others have been given too much or not enough control and responsibility for your parents. This is a problem that millions of families must face, and family dynamics present since childhood will plague you and your dealings with your family, so it pays to start slow, and early, and make sure that your parents and siblings know that you have their best interests at heart.