Avoid financial dependence on children post retirement

Making adequate provision for your spouse and yourself for a prolonged period of retirement must take precedence over distributing your wealth among your children

One of our clients, Krunal, called me about getting advice for his father who was retiring from a senior level position in a private-sector company. Krunal mentioned his father would soon receive his retirement dues, which would run into a couple of crore. His father had also invested in shares, mutual fund schemes, and bank fixed deposits.

Krunal’s father was thinking of distributing a part of this retirement kitty among his three children and using the balance to generate the necessary income for his retired life. Krunal had convinced his father to speak to us before acting.  

For perhaps the first time in their lives, people who have retired or are on the verge of retirement, are required to take decisions on investing such large sums running into crore. They find themselves ill equipped to take such decisions and frequently depend on equally ill-equipped friends and family members for advice. Many relationship managers spring up on such occasions to provide free advice, but their advice is often more beneficial to them than to their clients.  

I normally refrain from providing generalised advice. Here, I shall provide a few broad guidelines that can help in dealing with this issue.

First, remember that the best thing you can do for your children is not to become physically or financially dependent on them after retirement. Advances in medical science mean people live well into their late eighties or nineties. You have an obligation to your children to look after your health. Given such a long lifespan, there is a distinct possibility you will spend the last few years of your life being physically dependent on your children. The best thing you can do for them is to try and minimise that possibility by working on your wellness.

Remember the airline announcement about putting on your own oxygen mask first before helping others. First make provision for your own (and your spouse’s) retired life before distributing your “large” retirement kitty among your children. For example, a Rs 3 crore retirement kitty may appear large.

However, if invested in a manner that it gives post-tax return equal to inflation, it will provide Rs 1 lakh per month (adjusted for inflation) for 25 years only. In case you (or your spouse) survive beyond 25 years, no corpus will be left to pay for those years.  An adequate provision will need to be made for such eventualities. Meeting your children’s immediate financial needs must, therefore, be secondary.

Second, involve your spouse in every discussion so that she/he does not become dependent on the children after your death. Also, make a will and be clear about how your legacy is to be distributed. Your spouse and children should have pleasant memories about you. Your inaction shouldn’t create unpleasant disputes among them.

Last comes the investment of the retirement kitty. There is an old saying that a fool and his money is invited to every wedding in town. Find out how transparent the person is, whose advice you take, about the money she/he makes by advising you. Make an effort to get invited to the good weddings in town. Don’t be lazy and only choose from the weddings you get invited to.

Choose a registered investment advisor who, by regulation, is required to offer a transparent fee structure and put the investor’s interest above her own.  

Each individual will require a specific solution. But if you follow these broad guidelines, you should be able to enjoy your retired life on the beaches, as the TV commercials show.

The writer heads Fee-Only Investment Advisors LLP, a Sebi-registered investment advisor. Twitter: @harshroongta