Parents should secure their own oxygen masks first
Historically, the idea of leaving an inheritance to children was a primary concern for parents around the world, even labelled a sign of success.
However, planning to leave a financial legacy can be an emotional journey for parents – especially during uncertain economic times, where finances are often stretched. It may also be a decision that could impact their own retirement plans, in terms of how much they are able to save and how they manage their retirement income.
Ensuring a comfortable retirement
While leaving a financial legacy may seem important, it is more important for parents to ensure that they are able to live out a comfortable retirement, without becoming a financial burden to their children, as they age.
On an aeroplane, we are advised to put our own oxygen masks on first, before helping others. In the same way, parents in retirement should make sure that they have enough to sustain themselves first, before they try providing for their adult children.
Not only are people living longer, but some of the challenges of modern life mean that many pensioners have not saved as much as they hoped to and are at risk of running out of money in retirement. This could result in them being forced to lean on their kids to cover their essential expenses later in life.
A new survey by Genesis Analytics and the Financial Sector Conduct Authority (FSCA) reinforces the problem that has long faced many South African retirees, highlighting that the majority cannot even afford to retire, let alone continue to fund their current lifestyle. The findings show that only 12% of the 3.6 million retirees had some form of income in 2020, with over 90% of retirees unable to maintain their pre-retirement standard of living, and two-thirds with less than R50 000 in their retirement assets.[1]
How to leave a lasting legacy
It is critical for parents to find a healthy balance between looking after themselves and any children that they may leave behind. While many children may accept and be willing to look after their parents as they age, is this what parents really want?
With this in mind, financial advisers should revisit retirement goals with their clients and allow them to reassess their current personal finance situations to ensure that their future income needs are met first. To do this, an appropriate allowance should be made for future expenses and associated inflation, over a sufficiently-long time horizon, that typically exceeds the average life expectancy. The general rule of thumb is that clients’ planning time horizon should span to age 95 for males, and age 100 for females, as there is a 10% chance that clients will still be alive then and will, therefore, require an income.
Once clients know how much they can withdraw each year in retirement, advisers are well placed to suggest a range of appropriate retirement income solutions that can cater to their needs.
A safety net
Instead of scrimping and saving throughout one’s adult life in order to leave money to children, parents should rather focus on reducing their risk of depending on their loved ones later in life. It is our view that the best way to do this is with a life annuity, which is guaranteed to provide an income for life.
What many people don’t realise is that a blended living annuity, which uniquely has a life annuity as an investment portfolio option, provides clients with a safety net in the form of a secure, guaranteed income throughout retirement. This reduces the risk of having to turn to children or other family members for financial support in their final years. Once income needs are secured – in other words parents have their oxygen masks on – the remainder can go towards their kids’ inheritance.
[1] https://www.moneyweb.co.za/financial-advisor-views/is-retiring-comfortably-a-reality/
This article first appeared on FA News Magazine (page 69).