Retirement planning for older parents

My mom was 33 when I was born; 35 when my sister came along. Three decades ago, that wasn’t typical.

Today, Canadian women aged 30 to 34 have the most children of all age groups—the first time that’s happened in recorded history, says demographer Don Kerr.

People “are delaying family life,” says the Western University professor, “just like other major life transitions: leaving the nest, finishing education, obtaining the first full-time job, and getting married.” Kerr calls these changes “unprecedented,” and says it “reflects a marked shift in the timing of fertility.”

While having children later often means doing so with a stronger balance sheet, those parents will also bump up against a host of non-traditional problems.

They’ll be trying to save for retirement while spending on children, and could still have kids at home after they’ve retired—which will raise living costs. And, if a 60-year-old single dad with a 20-year-old daughter falls gravely ill, he may find she’s not financially or emotionally able to care for him.

As advisors replenish their books with younger clients, they’ll have to juggle these competing priorities using estate, insurance, investment and planning strategies.

Attitude adjustment

Nicholas Miazek, a Calgary-based vice-president with Fiera Capital, became a father in his early thirties.

He says many thirty-somethings have established expensive habits—driving nice cars, going out often, taking exotic trips—that don’t always change when children come along.

“I have friends who play hockey twice a week and go to pub nights, and they’re desperately trying to keep up those activities, but then need to pay for childcare,” he says. “Another friend with three children says a family vacation on a shoestring budget will cost him $10,000.”

So he has clients track spending and map out budgets before having children to ensure they can fund their new lifestyles while still saving for the future. And, says Dawn Hawley, a planner at Angus Watt Advisory Group at National Bank Financial in Edmonton, Alta., early retirement may be unrealistic for older parents.

“We have a lot of people still trying to retire at 55 or 60,” even though 70 or later may be more realistic for a parent who started her family at 45, she says.

It falls to advisors to use income projections that demonstrate the benefits of working longer.

“Show them the difference delaying retirement by two to three years will make and how it will allow them to meet their overall objectives,” she says. “Then, check every year or two to ensure you’re on track.”

Parents may also find themselves simultaneously saving for retirement and children’s educations.

To grow both buckets, says Miazek, “I always treat the education savings asset mix separately from retirement capital, because they’ll be spent in different time horizons and at different rates.

“With education money, you have to be more aggressive at the front end and more conservative as children get closer to post-secondary school. I wouldn’t do that within a blended mix of their retirement, mid-term and education savings.” Hawley also recommends parents own RESPs jointly in case one parent dies. Otherwise, “that RESP becomes part of the estate. It doesn’t go to the child as a beneficiary.”

And if parents want to help kids with down payments or weddings, Miazek factors those lump sums into projections, and asks how they’ll raise that money or where they’d like to cut.

Or, “perhaps investors will find they need to stay more aggressive for longer. I plan to age 95 or beyond, depending on family longevity.”

It also may not be in older parents’ best interests to support children after they reach age 18, and Miazek asks whether they’re willing to sacrifice their own retirements to do so.

But there’s a middle ground. “Charge them rent,” he tells parents, “even if you set it aside in a TFSA, and give it back to them as a down payment for a house. Give them the hand up that way instead of drawing from your own retirement.”

For parents with less discipline, he suggests downsizing to homes without basements. “That’s a clear but subtle way of doing it,” he jokes.

Insure early and often

Life insurance is even more critical for older parents, since they’re likelier to die before children are fully launched. Hawley also recommends long-term-care (LTC) insurance, which she’s bought “so I don’t have to burden my children.”

Ideally, parents should pay up LTC before retiring, which usually takes about 20 years, she adds. So bring it up early in their planning, since someone intending to retire at 70 should buy at age 45—or earlier if they can afford it—to ensure they qualify and have time to make payments.

Life insurance for children may be another way for parents to provide some security while taking advantage of low premiums.

“[This] ensures they have guaranteed insurability and can increase the amount of coverage later. I purchased life insurance on my son when he was young. He’s now a racecar driver,” Hawley adds, and isn’t inusrable today.

But Miazek is skeptical of critical illness insurance for children. He considers, “What are the premiums versus the benefit, and then the conditions for getting that pay out? Would saving that money in a TFSA be more beneficial?”

If clients still want CI for peace of mind, “put a return-of-premiums rider on the policy. That’s an additional cost, but it gets you the working capital back so that you can redeploy it if the policy expires.”

Prep kids early

Older parents also need to talk to their children about money early.

“There’s more risk they won’t be around when kids are making the mistakes of young adulthood,” says Miazek. “So financial coaching is important. It’s also an opportunity for advisors to be involved with the next generation. Offer to have conversations about budgeting and saving.”

Another reason to broach the topic? “Children of older parents will inherit younger,” he says. “It’s not prudent to give an 18-year-old $1 million to burn through, so often we look at a trust structure with incremental encroachment on capital.”

That way, trustees can make disbursements for education and healthcare, but the child can’t access the rest until a certain age. “Often I suggest 25,” he says. “And even then, give access to a third or half, and then move out in five-year increments.”

Miazek also counsels parents to give trustees liberal discretion if the child is unusually bright or mature. “If a child is an entrepreneur, parents might want her to have some capital earlier.”

That’s easier to stomach if those trustees are money-savvy friends or family members. “They’ll take hands-on approaches to educating beneficiaries about the tax opportunities and the obligations of the trust,” he says.

Guardianship is another issue advisors should broach early. And the usual choices won’t suffice. “Friends and family are also older when you start, so is it appropriate to name your 80-year-old parents as guardians?”

Instead, tell clients to consider younger siblings or cousins. And they should add alternates in case their first choices die, opt out or become incapacitated.

And it’s not just parents who need solid wills, powers of attorney and estate plans.

“As soon as children turn 18 they should have wills,” says Hawley. “In Alberta, if someone passes—even if all they have is a bank account—without having named beneficiaries, the parents would usually have to go to court to access the money.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.