Time to Talk : Checking for Cracks in Your Parents’ Nest Egg
Who’s advising your retired parents on their investment portfolio and their personal finances in general?
If the answer is Peter Lynch or Warren Buffett, you can stop reading this now. Chances are your parents don’t need or want your two cents’ worth.
But if an investment legend isn’t running your folks’ money, it’s a good idea for you to know who is, and what basic financial strategies your parents are following with their nest egg.
As my colleague Liz Pulliam notes in her article today, baby boomers and their aging parents often have a tough time talking about financial issues that concern the parents’ long-term well-being.
“It’s none of their business,” the parents may say.
“It’s none of our business,” the kids might agree.
But both parties will probably come to regret thinking that way. In many families, the children will eventually be forced to deal with their parents’ estates. In the best-case scenario, that will simply mean inheriting a tidy sum. In the worst-case scenario--well, there are plenty of worst-case scenarios, as Pulliam’s story notes.
Many adult children may feel sheepish about reviewing their parents’ finances because the kids themselves are novices at investing. They may figure they can’t possibly give good advice.
That’s a valid concern. But if your parents are likely to rely on you in any way down the road--for help with day-to-day living, money management (especially for a widowed parent) or as executor of their estate--it’s better that you know sooner rather than later what kind of shape they’re in financially.
Where to start? Ideally, adult children with parents who are retired should have a basic idea of how much income the parents have coming in each month from Social Security and any pensions.
If that sum is more than adequate to support the parents’ lifestyle right now--without drawing down retirement savings in 401(k) plans, IRAs and other accounts--you can move on to a review of how those savings are allocated among investments.
Now, many children and parents may well find it impossible even to discuss the income issue. Parents may not be comfortable with children knowing their monthly income, or what they’re doing with it.
If you can’t broach the income topic, put it aside. It may be more important, long-term, to get a handle on the nest egg your parents have built up (and may be continuing to build) and how it’s invested.
This, too, could be a difficult conversation. But here’s a tip for both parties: If you don’t want to talk specifics, start talking generally about asset allocation.
Hopefully, your parents (or parent) have a good idea what their estate is currently worth, including the equity in their home, the sum in bank accounts and investments (including retirement accounts under their control) and other assets.
A simple question to pose: Are your parents more in the mode of preserving capital--i.e., investing conservatively--or are they still trying to make their nest egg grow rapidly?
A conservative approach would generally mean the portfolio is primarily in bank savings accounts, CDs and bonds or bond mutual funds (Treasury, corporate or municipal). Those investments generate interest income, but they aren’t growth investments.
An aggressive approach, of course, would mean the portfolio is largely in stocks or stock mutual funds.
There is no single correct mix of assets in retirement. At any age, most retirees need some growth investments. But the higher the growth component, the greater the portfolio’s vulnerability to a stock market downturn. And once you reach your 60s, 70s or 80s, you know that a plunge in the value of your assets could take longer to recoup than you may be able to endure.
What’s important is that your parents are comfortable with their asset mix, and that they can explain why they own what they own. They might well find such a conversation with you to be valuable because it may force them to confront their own doubts about the mix.
Which brings up the issue of advice, and how the portfolio was put together. If your parents rely on a broker, accountant, an investment newsletter, an insurance agent or other advisor, try to discuss with them how they picked the advisor, how long they’ve been using the person and whether they’re truly happy with him or her.
The sad truth is, as people age, they become more vulnerable to taking bad advice, or to being scammed outright. The older your parents get, the more important it becomes that you know they aren’t at risk of being fleeced by someone posing as a trustworthy advisor.
Again, you may rightly fear that your parents will be suspicious of your motives if you ask about their portfolio. (“They’ll assume I’m wondering about my inheritance.”) If that’s a concern, then get at the topic from a different direction.
One way to do it: Any retiree with a meaningful nest egg has questions about how best to draw down that sum. At age 65, for example, someone in good health might want to travel, make gifts to charities or kids or otherwise enjoy life partly by tapping into their nest egg. But they probably will worry about taking too much money out early on--and having too little left to live on later.
As with asset allocation, there is no hard and fast rule about how best to draw down a portfolio, except in the case of formal retirement accounts: The government has rules that mandate taking money out of IRAs, for example, beginning at age 70 1/2. Do your parents understand those rules? You can start a conversation by asking.
I realize what I’ve offered here is just a framework for talking about money issues. If children or parents have other tips on how to communicate on these subjects, and what both sides need to know, please e-mail me.
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Tom Petruno can be reached at tom.petruno@latimes.com.
