Should we be managing our parents retirement corpus?

Published: August 5, 2016 at 11:34 am

Last Updated on

I see more and more young earners trying to manage the retirement corpus of their parents. In a way, this is healthy and in a way dangerous.

Let us face it. Most retirement corpuses are not healthy enough. In the sense that one cannot wield them to generate an inflation-protected post-retirement income. This is especially true of our parents generation. Most of them never had any experience with equity or volatile instruments.

When a young earner tries to invest that corpus (or a part of it) in instruments unfamiliar to the parents in order to “generate better returns”, the results may not always turn out the way we want.

The first step in retirement planning is to recognize when senior citizens purchase an annuity. Or in other words, when can part of the corpus be exposed to volatile/risky assets and when to stick to the safety of senior citizen savings schemes and bank fds.

Utmost caution is necessary when working with a retirement corpus. A single market crash can destroy morale and self esteem. The usual rhetoric of “volatility = notional loss and it will all turn out okay in the end” does not apply to retirees.

I recommend first checking whether a monthly income that increases at least at the rate of 5-6% a year can be generated for the first 10-15 years in retirement using only ~ 60% (or less!) of the corpus.

If the answer is no, buy an  annuity.

If the answer is yes, then one can chalk up a plan using a tool like the inflation-protected Income Simulator.

Why should I buy an annuity? My parents are living with me. Why cant they invest in more tax- and return-efficient products?

If you are going to DIY , then to put it bluntly, you could die before them.

If you seek professional help, then it is best that the parents directly interact with the SEBI registered fee-only advisor.

Even otherwise, being from a different generation, they may not be entirely comfortable with handling volatility. Therefore, they will have to be made familiar and comfortable before going ahead with the plan suggested by the children.

Most parents get a pension, either from the government or from a superannuation plan. If this sum is healthy then, one might actively manage the remaining corpus (if any). However, they are at a stage in life when sudden medical expenses maybe necessary (a health cover is not a one-stop solution). Therefore, the room available to “play with” is rather limited.

Somehow I feel, it is better if we do not thrust our new-found and often preconceived notions of financial literacy onto our parents.

Unfortunately, many parents are to be blamed too. When FD rates started going down, they wanted other avenues which gave “better returns”. We all need to remind ourselves from time to time that there is no free lunch.

There are many posts on managing a corpus after retirement at freefincal. The most important ones have been compiled into a free e-book: Post-retirement income generation strategies. Do check it out.

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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association. For speaking engagements write to pattu [at] freefincal [dot] com
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