If your parents are getting older, you may have to assist them in various aspects of daily life - one of which may be their investment strategies. And by being "proactive," you may be able to make things much easier for Mom and Dad in their retirement years.One of the best things you can do for your parents is to find out if they are investing in a way that’s appropriate for their situation. When many people get older, they tend to get more financially conservative, choosing investments that offer significant preservation of principal, such as certificates of deposit (CDs) and U.S. Treasury securities. And of course, this is understandable, because your parents, like many people at their stage of life, probably don’t want to take too many financial risks. And yet, by "taking no chances" with their money, they could actually be taking on more risk than they think.
Why? Because by investing too conservatively, they might not be able to afford the lifestyle they’ve chosen, given the importance of two factors: longevity and inflation.
Let’s consider longevity first. The average 65-year-old man is expected to live 16.5 more years, while the average 65-year-old woman has 19.1 more years of life expectancy, according to the Social Security Administration. And these figures, as noted, are averages, which means that half of all men and half of all women can expect to live longer than 81.5 years and 84.1 years, respectively.
Consequently, your parents could easily spend two or three decades in retirement. And if they’re investing predominantly in fixed-income vehicles, their returns may not even keep up with inflation. For example, suppose your parents’ total cost of living is currently $80,000 per year. If inflation were to average three percent annually over the next 20 years, your parents would then need more than $144,000 per year just to maintain the same standard of living that they enjoy today.
So, given the possibility of a long retirement combined with the cumulative effects of inflation, your parents will likely need at least some growth potential in their investment portfolio. A reasonable percentage of quality stocks may be able to provide them with that potential, but their mix of investments really depends on their individual needs, lifestyle choices and risk tolerance.
Here’s one other investment-related question you may want to raise with your parents: How much should they take out each year from their 401(k) and IRA? It’s essential that they neither withdraw so much that they deplete their accounts nor so little that they can’t afford the things they enjoy. Yet, because the ideal withdrawal rate depends on several factors - investment mix, risk tolerance, life expectancy, other sources of income - it’s not always easy to determine the appropriate amount.
You might not have the expertise to help your parents address these two issues - choosing the right investments during their retirement years and taking out the right amounts from their 401(k) and IRA. And that’s why you may want to encourage your parents to work with a professional financial advisor, if they don’t already have one. At their stage of life, they really need to make the right moves with their money - so do all you can to help. You’ll be glad you made the effort.
Submitted by Laura Evans, a financial advisor with Edward Jones in Richmond Hill.