While the child can find employment in the future and earn an income, parents do not have that luxury if they exhaust their assets

A family that pays together, stays together, but the key is to set the limits

When helping out children, parents must set the limits in terms of money and time

Many parents are financially supporting their adult children in a meaningful way in the aftermath of the covid-19 pandemic that has resulted in rampant job losses, pay cuts and professional uncertainty.

Take the case of X, whose son had quit his job to start an organic farming business two years ago. The pandemic disrupted the business’s demand, supply and distribution chains, leaving the son struggling to meet his family’s routine expenses. Or the story of Y, whose son could not meet his daughter’s undergraduate fees for a foreign university because of a huge dip in his portfolio value. Lastly, Z, whose lawyer son was suddenly diagnosed with brain cancer, leaving the son struggling to earn an income to meet his instalments.

In all the above situations, the parents stepped forward to bail out their children with financial support. X created a trust fund, which provided the son’s family a monthly income that met their routine expenses. The son was, therefore, able to focus on bringing his business back on track, knowing that his parents were meeting his family’s basic needs. Y offered his son an interest-free loan for three years to pay the undergraduate fees so he would not need to redeem his portfolio at a loss. Z shook off the loan collection leeches by paying down the home loan entirely and securing the home papers for his son.

But parents must wear their safety belts first before helping others. If their assistance towards their children negatively impacts their financial independence or goals, they must desist from offering such support. While the child can find employment in the future and earn an income, parents do not have that luxury if they exhaust their assets, leaving them eventually dependent on their children.

Hence, even if parents offer financial assistance, they must structure a broad framework of such financial support and set limits in terms of money, time or emotional involvement. This framework is crucial to establish expectations, else it may lead to unhealthy dependence or friction on both sides.

Generally, the financial assistance offered can be of four types: income, expense, asset and liability.

Income: Income support comes by way of providing a fixed inflow each month. One of my clients redirected her rental income to her daughter. Other sources of income may be in the form of trusts, dividend from stocks or interest from bonds and deposits, or systematic withdrawal plans (SWPs) from mutual funds.

Expense: Parents can take over a part of the children’s expense, such as equated monthly instalments (EMIs), rent, school fees or routine expenses. It is important to ensure that the expense commitment is fixed and predetermined so that expense spikes do not cause steep outflows on certain months or extend beyond the decided time limit.

Assets: Parents may decide to fund an asset, such as a car or a house, partially or fully. In some instances, parents may find it prudent to gift a property during their lifetimes rather than bequeath it after their death. If parents have the financial wherewithal to transfer wealth during their lifetimes, it may be more beneficial for their children now, than to leave behind a large inheritance when the need is not so dire. In fact, transfer of wealth during the parents’ lifetime offers them immense satisfaction when they see that the money is being put to good use, such as educating a grandchild, buying an asset, or closing a loan. However, such transfers must not materially affect the financial independence or lifestyle of the parent.

Liabilities: Though taking over a liability is not advisable for retirees, parents can choose to pay down a child’s liability, such as a credit card bill for the month, or car and home loans, if their finances are healthy. They may also choose to pay down a loan entirely or partly instead. But parents must refrain from taking on loans as a co-signee, since the responsibility for repaying the loan then shifts to them, at least partially.

Financial advisers play an integral role in deciding whether elders have the wherewithal to support their children. They can project expenses into the future and ensure the existing corpus is able to weather inflation, taxes, market disruptions and unplanned expenses. Such calculations must be arrived at after factoring a very conservative return on assets, or in some instances, even writing off a part of their assets. After leaving an adequate buffer, any remaining surplus can be used to help their children financially. Advisers can also act as an objective third party, highlight the consequences of certain financial decisions on both parties, intervene between the child and parent, and enforce discipline when financial boundaries are crossed.

It is natural for parents to help their children in distress just as children would want to do so for their parents. This support is what binds families together, and strengthens and nurtures relationships. Parents need to walk the fine line between supporting an otherwise hardworking child who has fallen into bad times; and supporting an entitled child and creating an ongoing dependency. If it is the former and you have put on your oxygen mask, go ahead and strap it on for your child too.

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How to protect the interests of elders suffering from cognitive disorders

Encourage the elder to appoint a trusted person who can help her take money decisions

I received a distressed call from one of my clients recently. The client’s mother was accusing her of stealing her money and wanted the daughter to move out of their family home. The mother is also my client and, hence, the daughter was seeking my intervention in resolving this unpleasant situation.

The mother, X, had been suffering from dementia, a degenerative cognitive disorder, for a few years now. An early sign of any form of cognitive decline is the inability to manage personal finances. Being X’s financial planner enabled me to recognize the symptoms early on and alert the daughter to X’s condition. X would struggle to remember recent conversations about her finances. She had difficulties filling application forms or signing cheques. Peculiar demands for redeeming large sums of money for insignificant payments, growing distrust of family members, and paranoia about losing all her money were some of the behavioural changes we noticed over time.

Disorders of such sort can create a litany of challenges for the individual’s families, who must now provide care in every aspect of the elder’s life, be it medical, personal or financial. They must also learn to deal with irrational and erratic behaviour, as was the case with X’s daughter.

The average life expectancy in our country is increasing each year and, hence, the odds that our ageing relatives’ mental faculties will deteriorate is fairly high. Elders with diminishing mental capacity are the most vulnerable to financial fraud and manipulation. Hence, you need to start putting in place guardrails to protect them today and in the future. Here are the things you can do.

1) Encourage the elder to appoint a trusted person—a friend or family member—who will be involved in her financial meetings and decisions. It is important to obtain the written consent of the elder in this matter. Every financial decision, whether it is about investments, estate planning, taxes, expenses or withdrawals, should be made in consultation with this designated person. If the elder is working with a financial adviser, the adviser must be informed about the trusted person, so the adviser can reach out to him to validate financial decisions or transactions.

2) Discuss with the elder if she wants to provide the trusted or designated person a mandate or a power of attorney (PoA) to act on her behalf. A PoA can enable the designated person to authorize financial transactions, execute the elder’s Will or be a trustee in the client’s estate plan. Making a Will is crucial for people with any form of cognitive impairment. If it is already made, ensure it is updated and kept safely.

3) Ensure that all money decisions with respect to investments, goals, taxes or expenses are documented and updated regularly. Doing so will not only help the designated person understand the elder’s requirements, but will also track any change in priorities or goals and hence identify inconsistences such as those relating to sudden expenses or withdrawals.

4) To help retain the elder’s independence and lower the impact of financial fraud, it is advisable for the elder to use a debit card instead of a credit card. A debit card can only be used to the extent of funds in the bank account, unlike a credit card, where the spending limit can be much higher.

5) With memory loss, the elderly may struggle to stay in control of routine payments such as utility bills, rent and insurance premiums. It is better to automate such payments, wherever possible, to avoid delays and penalties.

6) Collect, file and store important documents in a safe place and ensure the designated person holds a copy of all the originals. Ensure that the beneficiaries and nominees are properly assigned to all bank accounts and investments, including any assets held in the safe deposit. Create a digital file for all login details and passwords. Share this with the designated person only when the trust level is high.

7) A joint bank account may be opened with the designated person to enable him to transact on the elder’s behalf. However, this should be done only if there is a high level of trust, else the designated person can very easily misuse this trust for personal gain.

8) It’s important to simplify the financial and non-financial asset portfolio of the elder. Consolidate the portfolio and reduce the number of investments, so there are fewer items to monitor. Remove illiquid assets, such as property, from the portfolio, which requires management of rentals, tax, maintenance charges and so on.

If an elder has identified you as a trusted person, you are not only protecting her from being exploited by others, but also preventing her from harming her own financial well-being. She is fortunate to have your guidance and counsel in realizing her needs and goals. It also puts you in a position of great privilege and even greater responsibility.

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Manage your portfolio dynamically to get a return that keeps pace with inflation

My 98-year-old grandfather passed away a few weeks ago. Forced to flee his birthplace Burma because of the Japanese invasion during World War II, my then 20-year-old thatha trekked thousands of miles to India, braving disease, wild animals and perilous terrain. After entering India as a refugee in the 1940s, he rebuilt his life from scratch, starting out as an announcer and going on to become the first director general of Doordarshan.

Though thatha fought intense personal and professional challenges, he still provided adequately for his family on his meagre salary. He principally grew his wealth by investing in real estate and fixed deposits and never felt the need to invest in anything more aggressive. I told him that his generation had it good because they had the luxury of being risk averse with their investments. Thatha lived in times when fixed deposit interest rates were as high as 13%. But we don’t have that luxury today.

We live in a world of falling interest rates. If imminent retirees are to stretch their money through their lifetimes, they need to generate a return on their portfolio that is higher than inflation (also known as real return) by at least 2-5%. The current falling interest rate scenario is especially worrisome for those who have recently retired, and have a good 20-30 years of retirement to fund; their real returns may decrease over time because of either falling interest rates or increasing inflation. If bonds deliver a post-tax return of 6-7% and inflation is on average around 5-6%, the real return is barely 1-2%. In other words, wealth is essentially growing at 1-2% during retirement. I shudder to think what the future holds if our interest rates drop to 1% or even negative rates that we see in the US and other European countries today.

So, the question is: how do we determine how much to draw down from a retirement corpus to not empty it before our time is up? It’s difficult to attribute a rule of thumb for retirement draw-down, since effective portfolio management is about overall return as opposed to fixed return.

In fixed-return portfolios, you earn a predetermined income, but it does not adjust itself to inflation. Exposing your entire retirement portfolio to annuities forces you into such a scenario. As real returns fall in the future, you may need to compromise on your lifestyle to adjust to the fixed annuity. Such a strategy is fundamentally flawed since it leaves you ill-prepared to handle adverse events such as medical emergencies or even routine increase in expenses. Partial investment in fixed annuities is more desirable.

In an overall return approach, you can dynamically manage the portfolio to generate a return that keeps pace with inflation, and maintain your standard of living. Your initial draw-down may be lesser at say, 3-5% of the portfolio value in the early retirement years, increasing to 15-20% halfway through retirement, and ratcheting up to nearly 70-80% towards the end of retirement. Such a portfolio incorporates regular income generation through interest, annuities, dividends and systematic withdrawal plans (SWPs); as well as growth in the form of capital gains, which provides the added fillip to handle routine or unplanned outflows.

Let me illustrate with an example. A is 60 years old, with a current corpus of ₹1 crore, looking to fund his retirement over 30 years. His annual expenses are ₹6 lakh today. Assuming an average portfolio return of 7% and inflation at 5% (real return of 2%), A’s assets will deplete by age 80. To ensure A stretches his money till 90, here are his options: 1. Cut annual expenses to ₹4.2 lakh, keeping growth and inflation constant. Hence for every ₹1 crore of investment, he can draw down no more than ₹4.2 lakh annually. 2. Retain expenses at ₹6 lakh, but increase his average portfolio return to 10%, inflation being constant. The real return needs to be at least 5% to ensure A doesn’t exhaust all assets. In both the scenarios, A’s capital depletes by the end of his lifetime. If he wishes to preserve his original corpus, A can draw down only ₹3.7 lakh annually on a 7% return and ₹5.6 lakh on a 10% return.

For most retirees, generating that 5% real return is a challenge, since such a return can only be obtained through a combination of equity and debt investments. Assuming average equity returns of 12% and debt returns of 7%, a blended portfolio must have more than half of it exposed to equity to generate such a real return!

So, what are you going to choose? Risk today or risk later? Money at the end of your life or life at the end of your money?

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Mr Hari, not his real name, is in panic mode because the market seems to be in chaos. He wants to dump his entire equity mutual fund portfolio and put all the money in safe fixed deposits. He’s decided he wants to play it safe.

Is he doing the right thing? What would your advice to him be?

Here are more facts. Mr Hari is about a decade away from retirement. To retire comfortably or to set retirement planning goals, at least 40% of his money needs to be invested in equity funds. Investing in debt funds is safer, but it would also earn him less. To meet his post-retirement comfortably, his investments need to grow at more than twice his withdrawal rate.

At the moment, his money is balanced perfectly between equity and debt. If he moved all of it to debt, he would run out of money seven years into retirement, because his withdrawals would exceed his growth.

At times like, a wise financial planner could do a great deal to reassure the client and remind him of the bigger picture.

Most people look at the weather rather than the climate. The weather changes from moment to moment: the sky could look cloudy in the morning but be bright and sunny by lunchtime. Would you wear a raincoat, just in case, every time you saw a few dark clouds? If you went by the weather, perhaps you would. But if you reminded yourself that the monsoons were a long way off, or that it was still winter, then you might decide that you would just duck into a doorway and wait in case of a small shower.

At PeakAlpha, we help our clients take the long view.

The market fluctuates, exactly like the weather does. You might feel tempted to play it 100% safe and take zero risks if market conditions feel unpredictable or volatile. But a professional financial advisor would help you settle your funds at a level of risk that would have the  best change of delivering your retirement goals to you, despite the transitory ups and downs of the market.

In effect, what you need is a professionally designed, scientifically calculated, calibrated ‘risk cocktail’ that balances risk and safety, equity and debt, in a way that is perfect for your needs and goals.

If you have questions about investing for your post-retirement life, our award-winning financial planners  & Investment Experts are just a call away at +91 9945234304 .  Also, log on to www.peakalpha.com  to know more about independent financial advisors.

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