Retirement can be an uncomfortable topic for children to discuss with their parents, as it is challenging for both parties to accept the inevitable effects of aging and the impact – both financially and emotionally – that this is likely to have on the family.

Failing to have this conversation, however, could result in a situation where parents have no choice but to depend on their offspring in their golden years, placing additional stress on not only their pockets, but also their relationship.

According to Emma Heap, Managing Director of Retail at 10X Investments, having a conversation of this nature also allows individuals to get a glimpse of what responsibility lies ahead of them and learn from their parents’ retirement planning mistakes where possible.

“Being ill-prepared for retirement does not just put financial pressure on the individual, but also on their relatives, placing them in the morally and financially difficult position of having to assume a level of responsibility. Regrettably, this financial responsibility is often shouldered at the expense of their own retirement saving, which simply perpetuates a cycle of ill-planning and dependency.”

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Being ill-prepared for retirement does not just put financial pressure on the individual, but also on their relatives, placing them in the morally and financially difficult position of having to assume a level of responsibility

Heap suggests four helpful discussion points that individuals can focus on when having this difficult conversation with their parents:

1. Do they have a financial plan and budget that matches their retirement goals?

This financial plan should set out their goals and how they intend to fund these. Your parents therefore need to understand the type of lifestyle they want to maintain throughout retirement and budget accordingly, taking into account their assets and liabilities, income and expenditure.

2. Consider the most appropriate way to deal with their retirement fund and other assets

In order to do this, it is important to review your parents’ net worth, which is essentially their retirement savings and other assets, less their debts.

Depending on the type of retirement fund, they will have the option to claim a portion of the proceeds as a cash lump sum upon reaching retirement. While this may be tempting, it is important to remind them that the purpose of this retirement fund is to provide them with adequate income throughout their retirement years.

Your parents have worked for years to build up this nest egg and deserve to spoil themselves, however, they need to be realistic about the cost of maintaining their lifestyle throughout their retirement years and resist splurging with their proceeds.

Another issue to be wary of is high fees that can erode the value of their retirement savings. Although two to three per cent may seem to be an insignificant amount in the short term, over a long period of time it can make a serious impact on retirement savings.

Switching to an investment provider that offers competitive returns, using products that don’t necessarily require an advisor and utilising an index-tracking fund with lower fees can therefore majorly impact ultimate returns. Click here to visit the 10X platform which can offer fees advice.

3. How will they maximise the value of this money?

With the portion of retirement fund proceeds which they choose to not withdraw as a cash lump sum, your parents will be required to buy an annuity. This will involve choosing between a living annuity and a life (guaranteed) annuity at retirement.

A life annuity is when the insurer pays you a specified monthly pension for the rest of your life. This insures you against longevity risk as well as investment risk. The drawback is that your capital dies with you, and no money passes onto your heirs.

A living annuity transfers the risk and responsibility of securing an adequate income for life onto your shoulders. In return, you have greater investment and income flexibility and your heirs inherit whatever is left of your capital after your death.

It is important that your parents understand their options and consider what will maximise their savings.

4. What about their estate?

Find out if your parents have an updated will in place, and if they don’t, encourage them to draw one up or update it if necessary. The same goes for any nomination forms on their policies, so ensure that these reflect their latest intentions and circumstances.

Your parents’ retirement is about more than just money and their financial well-being, it is about ensuring the best possible life for not only themselves, but also the people whom they will eventually leave behind

Heap concludes that while talking to your parents about their retirement plans can be daunting, it is better to plan ahead while you all still have options, than only considering a plan of action when decisions need to be made and responsibility taken.

“Your parents’ retirement is about more than just money and their financial well-being, it is about ensuring the best possible life for not only themselves, but also the people whom they will eventually leave behind. Having an honest conversation will, at the very least, allow you to be as prepared as possible when the time does come for your parents to retire.”