By Dr. Jim Dahle, WCI Founder

Many middle-aged people become motivated to become financially literate, start saving for retirement, dramatically increase retirement savings, or do estate planning as a direct result of interactions with their own parents in their aging years. While this is often a list of “things I'll never do because I saw my parents screw this stuff up” (kind of like all those things we vowed we'd never do as parents), many of our parents have done a lot of things right.


Cultural Considerations

The first thing to address is that every culture and every family is different. In many cultures (particularly Asian cultures), there is an expectation that the kids will take care of their parents. Multi-generational households are the norm, as is the parents spending money they don't even have on the education of their children, with the expectation that their children will then take care of them in their golden years with their own cash flow. Although it seems odd to those of us from Western, individualistic cultures, it's actually not the world's worst financial plan. There are a lot of efficiencies that can be gained when multiple generations plan their finances together. For the purposes of this post, you just need to consider which family, societal, cultural, and religious views will impact these decisions and plan to deal with them.


Figure Out Where Your Parent's Financial Situation Is ASAP

Like with your own financial planning, the place to begin is to determine where they stand. While many parents are reticent to share with their kids (who wants to talk finances with someone whose diapers you used to change), you can often lead into this conversation by sharing what you're doing for your own retirement or even asking for their advice. Then you can work together, side by side, rather than lecturing your parents about what they should have done.

If they are willing to share or collaborate or ask for help, start with the basics, a balance statement and an income statement. An elementary business class will teach these two critical business concepts. A balance statement is just a net worth calculation: everything they own on one side of the ledger, everything they owe on the other side, with a total at the bottom. The total is their net worth. It can also be helpful to calculate the size of their nest egg, if any. That's just the net worth minus all the stuff they're consuming like their cars and house and RV and second house and that sort of stuff.

Then turn to the income statement. This is all of the sources of income on the left side and all their expenses on the right side. Hopefully, these more or less match up. When they don't, a small percentage of the nest egg (like 3%-10% depending on their age) should be used to make up the difference. Hopefully, borrowing is not making up the difference.

These exercises alone should either be a source of profound comfort and relief that your parents have prepared very well for retirement and have their finances in order, or the cause of a great deal of worry and distress if you discover that things are far worse than you even suspected.


Determine How Much You're Willing to Financially Help Your Parents

If things are in terrible shape, you'll likely need to make some decisions. Make them together with your spouse, but remember that your joint decisions should always be delivered by the blood relative. That is to say, I tell my parents what's up and Katie tells her parents what's up. It may be that you're just lending your expertise. It may also be that you're actually going to be writing checks every month. In the case of my parents, it was expertise. My dad was still working when we started having these conversations 20 years ago, about the time I became financially literate. Within a couple of years, I was their free investment manager and since then I've been appointed their executor. It wasn't that they were doing particularly badly, but their former advisor sure was. So not only did they get to save on their ridiculously high investment fees, but they actually received high-quality investment management services from someone who cares about their money just about as much as they do. You need to be really careful doing this sort of thing. Not only do you need to be very sure that you know what you're doing, but you also need to make sure your siblings and other closely related family members are also okay with it. You can be assured that you'll be blamed should anything go wrong and there may be the perception that you're weaseling in to try to get more than your share of their assets.


How Your Parents Should Spend Money in Retirement

You may need to teach your parents how people spend their money in retirement. There are actually lots of different methods, but for most it typically looks like this:


Guaranteed Income Sources

First, you spend your Social Security payments and any pensions you qualify for. Delaying Social Security to age 70, at least for the higher earning member of the couple, is usually a good move even if it means spending down the nest egg in between retirement and age 70. Obviously, that doesn't apply to someone in poor health.


Income You'll Be Taxed On

Next, spend any income that you'll already be taxed on. That includes interest, dividends, capital gains distributions, and rents from bank accounts, brokerage accounts, and income properties.


Required Minimum Distributions

Starting somewhere between age 72 and 75, your parents will need to start taking required minimum distributions (RMDs) from their tax-deferred accounts. These can be spent as well. They'll certainly be paying taxes on them so they might as well spend them if they want to. If they are charitable folks, Qualified Charitable Distributions (QCD) take the place of RMDs and are almost surely the best way tax-wise for a retiree to give to charity.


What If That's Not Enough?

If that isn't enough, then it's time to look at a couple of other options. The first is to spend some assets. That means making additional withdrawals from tax-deferred accounts, making withdrawals from Roth accounts, or selling assets in the taxable account, starting with those with the highest basis to minimize the tax hit. As a general rule, you want the total withdrawal from the nest egg (including income and RMDs) to be something like 4%, but the older your parents get, the more you can stretch that. It's probably fine to be spending 6% or so in your 80s and 10% or so in your 90s. Keeping an eye on it, being flexible, and adjusting as you go is a good idea.

If that approach starts bringing on legitimate concerns about running out of money, another consideration is to use some of those assets to purchase a Single Premium Immediate Annuity or SPIA. In 2024, an 80-year-old male can purchase a SPIA paying 12% guaranteed for the rest of his days. While that won't leave an inheritance, it can substantially increase the amount that can be safely spent. Taylor Larimore, who recently celebrated his 100th birthday, bought a SPIA at age 80 and another at age 81 and made out great on both of them thanks to good health.


In the case of my parents, the combination of a Social Security and a pension from the state that employed my father cover all or almost all of their relatively frugal expenses. We talked once about buying a SPIA, but they decided they didn't need it. Most years, they use their RMDs to give to charity, pay taxes, and then reinvest the rest in taxable for potential future spending needs or their legacy. They still haven't touched their Roth accounts as they approach their 9th decade of life. That provides a great deal of comfort to me, not only that they won't require any help from me, but that they can have a dignified retirement where they feel self-sufficient and generous.


Healthcare for Retirees

A big worry for many retirees is the cost of healthcare. Although most Americans become eligible for Medicare at age 65, Medicare doesn't cover everything and it isn't free. The biggest issue my parents had as they transitioned from their primary insurance being from the state providing the pension to Medicare was not paying for care, but getting care. Access was a big deal and they ended up for a while trying to get primary care from a special “Medicare clinic” set up for others in their situation. That didn't seem very dignified and frankly didn't seem particularly high quality. Eventually, they ended up with a primary doctor they trusted using a subscription/concierge model in conjunction with insurance. While their frugal natures didn't like paying that extra fee for access to good care, they recognized the value and could certainly afford the cost.

Long-term care coverage is another big concern. Many American families will have long-term care expenses for a year or two or even five before death. Long-term care insurance has lots of issues and I prefer to see people become wealthy enough to be able to self-insure this risk. I thought my parents were probably wealthy enough to do that on their own, but they weren't so sure and wanted the peace of mind of having a policy. When the state stopped paying for their policy, they started paying for it on their own.


Estate Planning

I'm proud of my parents. With only minimal prodding, in their 70s they went and met with an estate planning attorney in their state, made all the important estate planning decisions and had documents prepared to formalize those decisions. While many opt for revocable trust to minimize probate, in their state apparently probate isn't too big of a deal, so they just ended up with a will and no trust. As the executor of that will, I'll let you know how that goes when the time comes. At a minimum, estate planning generally consists of a will and making sure beneficiaries are properly named on all of the retirement accounts, annuities, and life insurance policies. Financial power of attorney, final wishes for the disposition of remains, living will, and health care power of attorney documents are also frequently included.


Access to Financial Information

Our ability to manage our own finances generally falls over time, that's why the financial power of attorney document is important. People need to plan for their own senility. This isn't an issue with my parents yet, but I'm pretty well prepared with all of the estate planning documents and since I'm already managing the lion's share of their net worth. But as they age and particularly after the first one passes, I'll need to become more involved with the little things like checking accounts and the locations of titles for the cars and such.

It's so important to have people in your life that you can trust to not take advantage of you financially, whether they are family, friends, or professionals.


Asset Allocation

Whether they are managing their own portfolios, you are managing it for them, or they have a professional financial advisor, you need to make sure they have a reasonable asset allocation for their goals. A retiree's portfolio is generally at its largest point and even small reductions in expense ratios or small increases in returns can have a huge difference. Taking on too much risk can have dire effects. It's a rare retiree that shouldn't have a substantial portion of the portfolio in safe investments like bonds, CDs, or cash. My own parents' 50/50 portfolio has done a good job keeping up with inflation without having too much volatility. Over the last two decades, they had a 19% loss in 2008 and a 14% loss in 2022, but only two small losses in other years. The portfolio has returned about 7% on average over that time period, which is certainly plenty to meet their goals of moderate growth with preservation of capital. About three years worth of RMDs are kept in cash and short-term bonds. They certainly have no interest in more exotic investments like Bitcoin, options, rental properties, or private investments. Stocks, bonds, and REITs will do just fine thank you very much and will certainly simplify my job as executor when that time comes.


If your parents are aging, it's time to have the talk. Just like it was awkward for them to tell you about the birds and the bees, it's going to be awkward for you to talk to them about finances. The sooner you do it, the better it is likely to go. You'll have more time to correct a bad trajectory, or at least to make changes in your own financial life that will allow you to help them that bad trajectory results in its eventual outcome.

What do you think? When did you have “the talk” with your parents? How did it go? What did you learn? Comment below!