The title of this article might confuse you -- planning for your parents' future? Isn't that their job, and not yours? Well, you might argue that -- but you might also end up with parents who haven't planned well, sufficiently, or at all. Or your parents may simply run into a lot of bad luck, leaving you faced with the choice of helping them out financially or not.
All that might be avoided if you and your parents plan well. (If they don't want you involved in their planning decisions, you might at least offer some tips and reminders.)
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Here's a look at how you might plan for your parents' future.
Start talking
Talking about one's personal finances is often considered taboo, even within families. That's a real shame, because there's a lot to be learned from discussions with family and friends about our financial goals and plans, how we manage our money, how we've overcome financial challenges, and financial practices that have served us well.
So talk with your parents about financial matters every now and then -- even when you and they are still relatively young. Ask about their plans for retirement and how they're saving and investing for it. You and they should have solid retirement plans in place, detailing how much income you expect to need in retirement, and how you'll get it.
Planning for expenses
You can help your parents and even yourself by reviewing and discussing how money will be spent in retirement. That can help determine how much income will be necessary in retirement years. For example, estimate how much will be spent on categories such as housing, food, travel, utilities, taxes, transportation, clothing, insurance, recreation, and healthcare. Be as thorough as possible; a close review of spending in the past year can help identify significant spending categories -- such as, perhaps, gifts.
Remember that spending habits will change over time. Retirees may spend less on clothing and transportation, as they're out of the workforce. They may cook at home more and spend less on restaurants in retirement -- or they may treat themselves to lunches or dinners out more often.
A critical spending category to plan for is healthcare, because it's likely to eat up a big chunk of most retirees' budgets. Young retirees may not spend too much on it, but costs can rise as people age and develop more health conditions. Consider this: According to the Fidelity Retiree Health Care Cost Estimate, "a single person age 65 in 2023 may need approximately $157,500 saved (after tax) to cover healthcare expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000 saved." And those figures don't even include over-the-counter medications, most dental services, and long-term care.
So be sure to plan for healthcare costs, along with other expenses. (Getting and staying as healthy as you and your parents can is one way to try to keep a lid on healthcare costs.)
Planning for income
Retirement planning also means figuring out how you'll get the income you need. Imagine, for example, that you or your parents estimate needing $80,000 in income in the first year of retirement. Social Security will certainly contribute some of that, but only a fraction. The average monthly Social Security retirement benefit was recently just $1,836 (as of May 2023) -- about $22,000 for the year. (Note that there are ways to increase Social Security benefits -- such as by delaying starting to receive them. Such strategies might serve you or your parents well.)
Other good sources of retirement income can include dividends, annuities, real estate, and even a reverse mortgage. With dividends, for example, if you have a $400,000 portfolio of stocks with an overall average dividend yield of, say, 3%, that will kick out $12,000 in dividend income per year -- about $1,000 a month, on average -- without the need to sell any shares. Better still, healthy and growing dividend payers tend to increase their payouts over time, helping shareholders keep up with inflation.
Be ready to help
You may not be planning to support your parents financially in any way in retirement, but it's a good idea to be ready to do so if needed -- just in case. If you leave things to chance, they might be in need when they're in their 90s and you're retired yourself, in your 60s, on your own fixed income.
Know that many Americans do provide some financial support to their parents -- especially first-generation Americans. According to a survey of 2,000 first-gen Americans, more than 70% help their parents navigate financial matters, 80% feel obligated to help their parents financially, and more than 40% support family members including parents.
So consider making it part of your retirement plan to be socking some money away in retirement accounts for possible future parental financial support. If it's never needed, that's great, and you can eventually spend the money yourself -- or leave it to your heirs.
