A retirement survey by financial services group Sanlam found that 51% of retirees could not make ends meet and a third did not have enough money to cover their medical expenses. Whether this is due to insufficient retirement savings or not preserving retirement benefits when changing jobs, most retirees will need to be supported by their adult children in their retirement years.
This is a conversation that children of retirees need to be having with their parents before they discover, too late, how dire their parents` situation may be. The mistake many retirees make is underestimating how long they will live, the cost of living in retirement, or the investment amount they will need to provide a reasonable level of income.
What usually happens is that, five or 10 years after retirement, they run out of money. It is usually only when the money runs out that the children first become aware of the problem. And now, unexpectedly, they need to support their parents financially.
By having the conversation at the beginning of the parents` retirement, ideally with a qualified financial planner, agreements can be put in place and expectations made clear. This allows the children to plan accordingly.
It would be less of a financial strain for the children to supplement a percentage of their parents` needs from the start of retirement. This would also allow the retirement benefits to last longer, instead of waiting for the funds to run out, leaving the parents financially destitute and fully reliant on the children. The conversation also requires parents to be realistic about their lifestyle needs.
Financial planner James Vigne of Villic Wealth says an honest conversation is required about what is affordable.
“Consider having frank, sometimes difficult conversations as a family to discuss their standard of living and how you could help, given affordability,” Vigne says.
“Have conversations about where they should live, their assets, vehicles, what they need to live off. Work together to make adjustments and set up a ‘game plan`. This can be tremendously beneficial because it allows both parties a clear understanding of what the expectations are.”
Depending on how much support you need to provide for them, you must be cognisant of tax consequences. For example, City Press reader Michael needs to assist his parents financially. He wanted to give them R1 million that they could invest and live off the interest.
“I want to give them a lump sum so they have a level of independence and don`t feel like they have to ask me for money each month,” says Michael. By giving them a set amount, he feels his obligations to them will be met.
Vigne says giving a lump sum is not ideal. Firstly, you must trust that the money would be used for the intended purpose and, secondly, lump sums may be considered as donations and attract donations tax, which is payable by the donor (the person giving the money).
“According to the SA Revenue Service [Sars], a donation may be any gratuitous [free of charge, gratis, voluntary] disposal of your property, money or rights. This implies that a lump sum to your parents would be classified as a donation, which attracts donations tax,” says Vigne.
“You may only donate R100 000 per tax year tax-free, thereafter donations tax is applied. There are, however, certain donations which are exempt from donations tax, such as a donation made to a spouse.”
That means Michael`s generous gesture could result in his having to pay Sars 20% in donations tax.
Vigne says Michael could use the R100 000 tax-free donation limit each year to, for example, pay off the outstanding balance on their vehicle or a portion of their home loan. (Note, the R100 000 yearly exemption is for you as the donor, meaning you cannot give every person up to R100 000 each year – you can only give, in total, R100 000 each tax year, free of donations tax.)
Vigne says a better approach would be to pay your parents` expenses as any bona fide contribution made by a donor towards the maintenance of any person is exempt from donations tax. He warns, however, that for the maintenance payments to be tax exempt, Sars would need to consider it “reasonable”.
“Essentially, every situation is different. You would need to ask yourself, would this contribution be considered as reasonable in terms of maintenance? Are you helping maintain their lifestyle or improving it? Are you generously gifting to them or contributing towards their maintenance?”
If the payments could reasonably be considered as improving your parents` lifestyle or exceedingly generous in nature, it is likely that the excess/improvements could be considered as donations and be taxable.
When it comes to taking over certain expenses, Vigne says one should start with taking over their most important expenses first, while being conscious of their affordability.
In retirement, medical aid is often a substantial expense, but also one of your most important needs. Consider adding your parents to your medical aid if you consider them financially dependent on you.
INSURANCE:
Insurance protects you and your parents` livelihoods. Consider reviewing their policies in detail and taking over their short-term and/or long-term policies.
Remember, the premium payer is not deemed the owner of a policy. Taking over your parents` life insurance would be a better investment than leaving it to lapse and losing all those years of premiums they paid.
BASIC NECESSITIES:
Buy them their basic monthly necessities such as toiletries and kitchen staples. The bottom line is that, like all financial commitments, providing for dependent parents is something one needs to plan for.
If you have parents who are retiring or recently retired, have the conversation sooner rather than later. Include all the family members so that everyone understands the situation and can contribute according to their affordability.
https://www.news24.com/citypress/personal-finance/51-of-retirees-cant-make-ends-meet-heres-how-you-can-support-your-parents-20210221
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