Q. My parents are nearing retirement, and I'm terror-stricken by the thought of them running out of money. What little savings they have is in CDs, and they keep buying things they honestly don't need. Is there anything I can do now to help prevent them from going under later?
--Adelle H., Severna Park, Maryland
A. Personal finance isn't always an easy topic to bring up, but my hunch is that your parents have done more thinking on this issue than you imagine. Ask them if they have any financial contingency plans for when they need medical help. Do they have enough insurance? Do they expect you to chip in as they get older? You may not like the answers they give you, but at least you'll have a clear picture of the situation and can prepare for it.
Be candid about your feelings on how they manage their money. You can't control their spending, but you can suggest that they visit a financial adviser, who will help them create a budget and maximize their savings, so their money won't run out earlier than they expect. Many experts recommend spending 3 or 4 percent of your total assets (stocks, CDs, cash) in your first year of retirement -- and increasing that amount by no more than the inflation rate every year after that. If your parents are spending more than this, a good adviser will give them a needed reality check.
I asked Dena Shapiro Frenkel, a Baltimore-based financial adviser with Ameriprise Financial, if your parents should have their savings entirely in CDs. She responded with a resounding no: "CDs are designed to be used for a portion of your cash reserves." Once you're retired, she says, you should have no more than four or five years of retirement money in CDs that mature at regular intervals (aka "laddered" CDs). Beyond that, says Frenkel, you risk running out of money, because the CD rates don't usually keep up with inflation. Everyone, including retired people, should have a diverse portfolio -- a combination of low-risk investments like CDs and higher-risk ones like mutual funds. Such a mix will minimize your risk, while creating the opportunity for greater financial returns.
Your parents might also look into a long-term-care insurance plan to cover the costs of a nursing home or home health aide. It can be pricey, Frenkel says, but if you have assets to protect and can afford the premiums, it's worth the expense.
If your parents are in good health, they might think about easing into the next phase of life with a "semiretirement" period in which they keep a foot in the work world. Any little bit of extra income helps, and any money they don't take out of their retirement accounts now means more money to draw on later. Many seniors who look forward to just kicking back on the porch find that they get bored sooner than they imagine, and they're happy to get a chance to contribute again. Do your parents work in a field where they can do some consulting, once they give up full-time work? Is there a part-time "dream job," like working in a flower shop or a marina, that they've always fantasized about?
The bottom line is, people are living longer in an age when government programs for the elderly face an uncertain future. If you don't want your parents to end up destitute, you need to start planning now to ensure that their money lasts as long as they do.
Text by Tracy Fernandez Rysavy