Don’t look now, but if your parents are in their late fifties or sixties, chances are pretty good that they’ll be moving back home – to your home – in ten to fifteen years. They’ll still be healthy. The issue will be that they’ll be out of money since many people in their late fifties and even early sixties have just a fraction of the amount of money needed to make it through a 20-30 year retirement. Many just have enough to make it five years or less.
There are a couple of things you could do. You could just ignore the issue and believe it won’t happen. You could move away and leave no forwarding address, hoping to hide somewhere. Or you could take on the issue head-on, figuring out if you are likely to need to take your parents in, perhaps help them take steps to delay the inevitable, and make choices now to be ready when the day arrives. Here are some steps to take:
Have the talk
People say that the two conversations parents and children find most difficult are those about sex and money. But if your parents are heading into retirement in the next ten or twenty years, now is the time to get a gage on how they are doing. You may not be able to get them to talk about specific numbers, but maybe you can find out things like 1)Do they have a pension plan at work or a 401k? 2) If they have a 401k, have they been putting away 10% or more right along (if not, suggest they start putting away 15% now) 3)If they have they have a 401k, have they let it build up their whole career or have they pulled money out? 4)Are they planning to stay in their home in retirement or downsize and use the savings for living expenses? 5)Have they talked to a financial planner about their readiness for retirement?
Hopefully, they have a pension plan or they have been regularly contributing to their 401k with no withdrawals. If they are planning to sell their home and downsize, they may be able to stretch their retirement savings a bit. If they have gone to a financial planner, hopefully he/she has started to help them realize whether or not they have saved enough. If from the answers to these questions it does not look like they have done much planning, brace yourself for the worst. At the very least, see if you can set up a meeting with a financial planner to discuss their status and look at options.
If you do get specific numbers, you can calculate the amount they have total in retirement accounts and other savings/investments (their net worth) to determine how much money they have available to generate income for retirement. (Do not count their home value in the total unless they plan to sell.) Once you have their net worth, subtract $400,000 for a couple or $250,000 for a single from the total to account for medical expenses in retirement, then divide by 25. That is the yearly amount they’ll have available to withdraw each year to fund their retirement and probably make it through without running out-of-money.
For example, if they have $500,000 saved:
Yearly Amount = ($500,000 – $400,000)/25 = $4000/year
In the case above, they would be able to generate about $4,000 per year before starting to deplete their savings. Add that to maybe $12,000 from Social Security, and they would have about $16,000 per year to spend. That would not be a good lifestyle for most people and they would need help with bills and expenses.
Set a Target
If you figure out that they need to be saving more, figure out how much they will need to pay for yearly expenses, and then figure out how much they need to save up to reach that target. Assuming they’ll receive $12,000 per year from Social Security, here’s how much they would need to save up to generate different yearly income levels:
Monthly Income Yearly Income Single Account Value Couple Account Value
$2,500.00 $30,000 $700,000.00 $850,000.00
$3,333.33 $40,000 $950,000.00 $1,100,000.00
$4,166.67 $50,000 $1,200,000.00 $1,350,000.00
$5,000.00 $60,000 $1,450,000.00 $1,600,000.00
$5,833.33 $70,000 $1,700,000.00 $1,850,000.00
$6,666.67 $80,000 $1,950,000.00 $2,100,000.00
$7,500.00 $90,000 $2,200,000.00 $2,350,000.00
$8,333.33 $100,000 $2,450,000.00 $2,600,000.00
Realize that without the expenses of work clothes, maintaining a car for work, and things like professional dues and meals out, the amount needed in retirement will be less than their income while they are working. If they pay off their home and cars, this will lower the amount needed even more. They might therefore be able to set their retirement income target at 70% of their current take-home pay or so. Of course, setting the target high reduces their risk in retirement.
Encourage them to save/invest if needed
If it looks like your parents aren’t ready, you’ll need to help them get into the best position they can. Have them pull together a budget using the income you expect them to have in retirement if things don’t change. Perhaps seeing what their life will be like if they head into retirement with $50,000 will cause them to decide to get passionate about saving.
You can then help them develop a savings plan to reach their goal. If they are five years or less away from retirement, just subtract the amount they have from what they need, then divide by the number of years they have left until retirement to determine how much they need to put away per year. Divide that number by 12 to determine how much they need to put away each month.
If they have more than five years until retirement, Multiply their monthly savings rate by the factor from the table below to estimate how much they’ll need to save each month since they’ll be able to invest to enhance their savings.
Years to Retirement Multiply Monthly Amount by
5 0.9
10 0.81
15 0.4
20 0.27
So, for example, if you calculate that they’ll need to raise about $2,000 per month to reach their goal and they have ten years until they will retire, they will actually only need to put away $2,000 x 0.81 = $1620 per month. This assumes that they invest the money in a diversified set of stock and bond mutual funds or a target date fund appropriate for their retirement date.
Note that they will only need to save 27% as much if they start 20 years early – their investments will make up the rest. If they are only five years away, they’ll need to raise about 90% of the difference through hard work and saving. There is good reason to start saving early. It may be too late for your parents, but you still have a chance.
Encourage them to work longer
If they don’t have enough saved up and it is clear that they will not be able to do so before their expected retirement date, encourage them to think about working longer. Not only will this allow them to pile up more money, but it will also reduce the number of years they’ll be drawing an income from their savings, reducing the amount they will need to have. As long as they are healthy and don’t have enough saved up to live comfortably, they should continue to work, even if it is only part-time near the end.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
