This Father’s Day, organise your dad’s finances: All you need to know
By Christopher Thompson
Give priority to retirement savings over children’s education or marriage
This Father’s Day, keep the expensive gifting ideas aside. Instead, spend time with your dad talking about money, and help him get his finances in order. The first step is to have an open and honest conversation about money. Start by talking about your finances. Tell him what you are up to, your goals, and how you are working towards them. Then, ask him about his.
To help your father with his finances, you need to understand his current investments, expenses and debts. Calculate his monthly expenses, health care spending, how much funds will he need once he retires, and whether his current savings and investments will enable him to manage his lifestyle through retirement.
Check with him whether he has created an emergency fund, financial instruments he has invested in and will they serve him throughout the retirement period. Finally, ask him for his goals and whether he has adequate health insurance. The discussion will help to take stock of the situation before implementing changes.
Cleaning up the investment portfolio: Your father could be holding multiple funds and fixed deposits
and does not know if those investments are aligned to his retirement goals. If your father has 20 mutual funds of various kinds, for example, remove the laggards and align the remaining towards his goals. If your father is retiring soon, a move to large-cap funds from small-cap funds might make sense for long-term goals and to debt funds for short-term goals.
From a tax angle, it would also make sense to figure out which investments are long term in case you are withdrawing and reinvesting. It will reduce the potential tax outgo if done right. In debt funds held over three years, for example, indexation can lower the tax burden. Refrain from withdrawing recent investments, if immediate cash requirements aren’t there.
It is also essential to make sure that the goals are relevant to your father’s life stage and needs. The investments can then accordingly be reviewed and changed if required. Reviewing portfolio needs to be a periodic exercise to ensure that it is on track to achieve his goals.
Tip: Restricting the number of financial instruments to 10 or less will help to manage the portfolio easily.
Help to plan for contingency: Health care expense is the most common reason for having an emergency fund when you are older. However, any last-minute situation such as unplanned travel might call for additional expenses. An emergency fund can help in such circumstances and ensures that your father won’t need to compromise with his monthly expenses. Every time an emergency fund is used, one needs to make sure it is replenished. For a retired family of two, 12 months worth of expenses set aside as an emergency fund is ideal. You can park a portion of this money in liquid funds and the rest in a separate bank account for quick access.
Tip: In case your father is suffering from a chronic disease, you can also make a separate health fund.
Set a plan for being debt-free: Talking about loans is usually tricky, but it needs to be addressed. Ask your dad if he has credit card outstanding, loans, or if he has borrowed from relatives or acquaintances. If he has not included this in his retirement planning, it can derail his goals and even put his post-retirement lifestyle at risk. If he is already retired, paying off loans should be the priority. Make sure that the highest interest debt, such as credit card debt or personal loan, is paid off first.
Tip: It’s okay to liquidate some investment if there’s a high-interest loan.
Parents first, you second: Children’s higher education and marriage are two big-ticket expenses for which parents save. But often, the amount fails to meet the expenses and parents end up taking loans to meet the gap, which could have severe repercussions on their retirement planning. Children’s education is subordinate to retirement, as a goal. In the worst case, you can take a loan which you can repay from salary after completion of your education. Retirement is inevitable, and there is no loan for retirement.
Your parents have to provide for their retirement from their investments unless they have a pension. They will need to allocate at least a part of their savings to long-term investments, such as equity mutual funds, to beat inflation. The remaining would be used for their day-to-day needs.
As a child, you should take the responsibility to ensure that your parents don’t spend on anything that would put their retirement at risk. Your parents should avoid taking any debt once regular income stops.
Tip: Ensure your parents don’t invest their entire savings corpus in fixed income but allocate a portion of it to inflation beating asset classes such as equity.
Get started on estate planning: Whether your dad is retired or not, having a Will and a power of attorney in place is essential. It is a necessity for anyone who has dependents. Not having a definite Will is one of the most common reasons for confusion and conflict in the case of an unfortunate event.
Having a Will ensures that your father will have peace of mind and the satisfaction of knowing that he might leave behind a legacy but not confusion. Ensure that your father gets a doctor’s certificate that states his sound state of mind while making the Will. Also, he should have witnesses during the process so that there are no conflicts on the matter in the future. Do remember to register the Will.
Tip: You can start by making an online Will and refine it later.
Organise the paperwork: Assemble details of all financial documents and information in one place. You might not need all, but you should know how to access them with your parents’ permission. These include bank account details, medical information, credit cards, loans, tax returns, insurance policies, bill payments and due dates. Also, get acquainted with your father’s financial advisor, if any.
Make copies of these documents and share it with your dad and your siblings. One can also digitise these documents and maintain the docket online if your dad is comfortable and savvy.
Tip: The Digilocker service by the government is a good option for maintaining key records. Excel spreadsheets can help maintain an organised and one-window view of your father’s finances.
Our parents taught us to save, and now it is your turn to help them put their hard-earned money to work so that they can achieve their goals and live happily.