Monday, 9 July 2012

Helping your parents plan for retirement

As people live longer, children have a bigger duty to plan for loved ones
By Magdalen Ng, The Straits Times, 8 Jul 2012

As life expectancy increases in most places around the globe, there are significant implications for those planning nest eggs.

Children are the main source of income for most retired parents in Singapore, accounting for 63 per cent, participants heard at a recent conference organised by the Insurance Risk and Finance Research Centre of the Nanyang Business School.

The next largest sources are: employment, 12 per cent, and savings, at 11 per cent. Other income sources for the elderly include rent, as well as income from spouses.

Last year, the average lifespan of a Singaporean was estimated at 85 years, according to figures from the Department of Statistics.

Experts are divided on whether life expectancy will continue to increase or plateau.

That aside, there are two important questions that everyone should be asking:
- How long will we live? 
- Can we afford to live a long life?
Those intending to - or expected to - support their parents financially in their old age should also give some thought to how to include their parents' retirement needs in their financial plans too.

Mr Daniel Lum, Aviva Singapore's director of product and marketing, noted that talking about finances and retirement may be a difficult topic for children to broach with their parents.

But he added that children need to be aware of certain details before they can embark on a realistic retirement plan for their parents.

Mr Gregory Fok, director of sales and financial services at Manulife Singapore, said that often when there are many children in a family, each one wrongly assumes that another sibling has done the financial planning.

Understanding your parents' retirement needs

Knowing what kind of lifestyle your parents would like to have after retirement is the first step in helping them plan for their finances. If they are planning to travel often, or to embark on new hobbies and activities, then extra monthly cashflow may be necessary to support them.

More importantly, it is necessary to know how much your parents have already set aside for themselves, to avoid duplication.

Mr Fok said that for some, there might be a tendency to splurge after receiving a lump sum of money for retirement.

Helping parents manage their money may be equally important.

He said: 'I met a couple where, the moment the husband retired and got a significant sum of about $500,000, he spent it on house renovations, bought a new car, financed his children's overseas education and went on holidays.

'After three years, the amount dropped to less than $100,000.'

Many insurers these days have rolled out annuity plans to ensure a steady stream of income after retirement.

For example, the Great Eastern Long Term GoldenCare Annuity provides a lifelong monthly annuity benefit for an initial lump-sum investment. It also provides additional benefits in the event of disability.

The Manulife 3G plan pays out lifelong yearly income to the insured, and premiums are paid over 10 years.

Protection needs of your parents

Having comprehensive medical, hospitalisation and surgical coverage will prevent a depletion of savings or retirement funds in the event of critical illness or surgery. Mr Lum said: 'Medical expenses are often unexpected and costly, so it makes sense to reduce the risk of high bills with insurance.'

If your parents do not already have medical insurance, it is recommended that they get it as soon as possible, so they will have less risk of having 'pre-existing conditions' that may be excluded by the insurer.

According to the Aviva Long Term Care Study 2011, the typical cost incurred by claimants averages out to be $2,000 a month.

The basic ElderShield plan introduced by the Government to provide basic financial protection to those who need long-term care, especially during old age, provides a monthly payout of only $400 for a period of up to six years when a person becomes unable to perform at least three activities of daily living, such as washing, dressing, and feeding.

It is possible to provide additional cover for one's parents by enhancing the plan with supplements.

What is my time horizon if I want to provide for my parents?

As a general rule of thumb, it pays to start financial planning as early as possible. A Great Eastern spokesman said the advantages of starting early include a higher chance of insurability and a longer time horizon for accumulation in terms of endowment and investment plans.

He said: 'The cruel fact of life is that, being older, the time horizon for savings may be shorter and premium rate for protection insurance would likely be higher as it usually increases with age. Therefore, it is always advisable and advantageous to start financial planning early.'

Mr Fok also said that ideally, children should start planning for their parents' retirement needs as soon as they enter the workforce, but it is never too late to start.

Should I cover myself?

An American International Assurance spokesman also urged children who are trying to plan for their parents to ensure coverage for themselves first.

He said: 'Always ensure that you are covered before your dependants, so that if unfortunate events such as accident or illness occur and you lose the ability to provide income for your family, your insurance policies' payout can be used to finance your medical bills and monthly expenses, which may include contributions to support your parents. This is especially important if you are the sole breadwinner.

'Being inadequately insured may also result in the reverse happening, such that you become a financial burden to your family and parents who are looking to retire.'

Retirement can be a scary affair for some, a milestone shrouded in uncertainty and bringing a loss of routine.

While it is important to meet the financial needs of your retiring parents, it is just as important to address their emotional and psychological needs.

Mr Daniel Koh, a psychologist at Insights Mind Centre, said: 'It boils down to making a transition in life where there are lots of changes, new expectations and letting go of an identity or self-worth.

'At that age, everything is routine and having to break away from this comfort zone and the benefits of having a stable income can be scary, especially for those who are not very well-off.'

Tell-tale signs of depression include a loss of interest in usual activities, a reluctance to join in family activities, and bouts of sadness or mood swings.

Retirees may also feel impatient or get agitated easily, or experience insomnia or a loss of appetite.

While taking up new activities or hobbies may provide retired parents with some temporary distraction from fear and anxiety, MrKoh stressed that it is necessary to help them maintain a sense of security and purpose in life.

'When this can be fulfilled, then other activities can be built upon it since the foundation is stronger. Doing something as a replacement, compensating for the loss or as a distraction can only be of temporary help,' he said.

Sources of income for retired parents in Singapore:

Children: They support 63 per cent of retired parents, participants heard at a conference organised by the Insurance Risk and Finance Research Centre.

Employment: 12 per cent

Savings: 11 per cent

Other income sources: Rent, income from spouses.

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