My parents have a Depression-era mentality. Despite the
significant wealth they created during their working years, they have a hard
time spending money, even on things that would make their lives more manageable.
They draw down their portfolio at less than 2 percent per year and are still
concerned about running out of money. How can we help them make the most of
these last years? Fear of being a burden is human
nature, but it’s possible to overcome it. You can show your folks that they are
financially stable and can afford to take better care of themselves with a
review of their retirement cash flow and a projection of future income and
expenses. Begin by noting their sources of income and expenses—home,
auto, vacations, medical. This is your baseline for projecting changes year over
year. To forecast conservatively, use a higher inflation rate and make modest
assumptions about their portfolio’s return and income from Social Security. You
should include increasing expenses (e.g., medical), but don’t forget about
medical benefits or long-term care insurance coverage, which may help protect
the portfolio. Finally, show your parents that they can support themselves by
extending the projection out to age 100—or even longer. Review their portfolio to ensure that they have appropriately
allocated among equity, fixed-income and alternative investments, and that they
are managing withdrawals for tax efficiency, IRA distribution requirements and
maintaining proper allocation. If your parents withdraw sums infrequently, see
if they will take smaller disbursements on a monthly or biweekly basis, like a
paycheck. This may reduce the psychological impact of withdrawing money. Arrange semiannual reviews involving you, your parents and
their financial advisor, and broach the subject of Mom and Dad’s withdrawal
rate. Finally, consider discussing your own portfolio with your parents. It may
ease their minds to see that you are in good shape financially.
Bernie Wolfe, Bernard R. Wolfe & Associates, Chevy Chase,
Md. Many who lived through the
Depression share your parents’ fear. To overcome it, they need to be convinced
that they are financially secure. Have your parents run financial scenarios using different
inflation, living expenses and rates of return assumptions. Ideally, a trusted
advisor would assist with this, but running projections is easy to do on the
Internet, and Mom and Dad might find it interesting—and empowering—to do it
themselves. If the projections show that they have money at age 100, this may
convince them that there is enough for themselves and their family. They could
begin taking the more standard 4 percent withdrawal, which is reasonable and
should leave assets for their heirs. It may help to set aside two years of living expenses in a
savings account, and let the investments grow separately. Tapping the investment
portfolio periodically to replenish the savings account may reassure them. Lastly, tell your parents how you feel. They may not realize
that it is stressful to watch them not spend on themselves when they can—and
should.
Christiane S. Delessert and Christopher Dalto
Delessert Financial, Waltham, Mass.
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