Joint Retirement Planning – Blind spots for YoYo Parents
A recent conversation with a client (husband and wife) who has 2 teenage children.
Client: “I have made it clear to them. I will provide them a good education and nothing else.”
Me: Don’t you want to leave any money behind for them? To give them a little extra support?
Client: “We will take care of ourselves first. If there are any left for the children, it’s an extra for them. Probably just the house.”
Me: I see. Do you have any expectation towards your children? Do you expect them to give you any allowance in the future when they start to work?
Client: “I don’t expect them to give me any allowance. If they give, it’s an extra for us.”
Me: Then what about your retirement?
Client: “That’s why I ask you to come and review for me!”
The “Before Graduation and After Graduation” Approach
Having children often creates another layer of commitment (and sometimes confusion) to the financial plans of a couple. Different couples have different attitudes toward how they want to provide for their children and without exception, all the parents I’ve spoken to have the welfare of their children as the most important priority.
One particular way of providing for children that I’ve started to identify as a pattern amongst some clients is a “Before Graduation and After Graduation” approach. Before graduation, they strive to provide their children with everything including as good an education as possible. The children must not lack anything they need (or even want) during this period. The mantra before graduation from tertiary education is to “invest in them now so that they can take care of themselves later”.
On the other hand, the approach switches to a very different or even opposite attitude after graduation. There are no financial support or gifts planned for the children. The children are expected to be as independent as possible and to do so as quickly as possible. The best gift the parents feel that they can give their children is to provide for themselves so that they will not be a future burden to their children. The mantra after their children graduates from tertiary education changes to “you are on your own”.
Once the children have completed their education, the goal is for the parents to enjoy retirement and freedom while they can still do so both physically and financially.
You’re On Your Own (“YoYo”) Parenting
As a parent myself, I am intrigued by the different parenting styles and ideas that friends and clients share with me. I call this type of “Before Graduation and After Graduation” planning style “YoYo Parenting” as the goal is create the effect of both the parents and children not burdening each other in the future. It might sound uncomfortable to tell the children that “You’re On Your Own” but to the YoYo Parent, it is better than asking the children for money in the future. It is tough love but love nonetheless.
Before I carry on to cover the financial planning aspects, I’ll disclaim and admit that I am not a “YoYo” parent. I’m more of a “We’re in this together” or a “WITT” parent which I’ll probably explore in a future article. While I may not agree completely with how a YoYo parent thinks, I’ve learnt to respect and appreciate their motivation towards thinking this way.
YoYo parents follow a different line when it comes to organising their financial plans and I’ve recognised that the traditional approaches such as legacy planning may not appeal to the YoYo parent. On the other hand, there are blind spots that YoYo parents tend to have and if you suspect you and/or your spouse is a YoYo parent, read on.
Basic Insurance, Education Savings and Lots of Retirement Plans
Financial planning for YoYo Parents are usually straightforward because of the clarity they have. First, basic insurance coverage with an emphasis on medical insurance for the whole family is a priority. Next is the setting up of a plan to provide for the children’s tertiary education and finally, retirement planning especially with a focus on having additional income at around the early 50s to 60s.
Financial decisions and assets are almost always made and held jointly and an unique observation I have is that quite often, there is very little interest in life insurance coverage for death.
The same clarity that YoYo parents have will unfortunately, create blind spots for them as they go about building their financial plans. In my opinion, these are the 3 most common blind spots that YoYo parents tend to have in their financial planning which can prove to be costly if neglected or unaddressed.
3 Financial Planning Blindspots For YoYo Parents
1. Not writing a Will
I may be over-generalising but YoYo parents tend not to have a will done. Perhaps, this is because legacy planning is not at the top of their priority and having a will done is perceived to be something that is related to gifting and legacy.
Yet, if you are a YoYo parent and you prefer not to leave anything to your children but to the surviving spouse instead, having a will is actually necessary. Consider what happens to someone who is married with 2 children but have not written a will.
Assets Distributions in accordance to the Intestate Succession Act (Non-Muslim)
50% Surviving Spouse
50% Divided equally among children
In this situation, the surviving spouse losses half of the retirement assets and they could be in the form of investment properties, personal investments, life insurance payouts, sole-name bank accounts and many other type of assets held at the point of death.
Getting a will done is more necessary than is commonly assumed. For this, the YoYo parents I’ve spoken to still takes a lukewarm attitude toward writing their wills partly because most of their assets are already held in joint name (e.g. HBD flats, joint bank accounts…etc) but more likely, they feel the right time to do it is later on when they are much older and this brings me to the next blind spot.
2. Underestimating Long Term Care needs
Growing old is a certainty and even if there are no major illnesses, the body will still wear out naturally. Physically deterioration even in the absence of any major illness can throw a big spanner into the “YoYo” plans. To begin with, both the husband and wife are already seniors so having each other as the sole long term care giver is unlikely to be a workable plan. In a worse case scenario, you can imagine one with partial disability looking after another with total disability. Eventually and quite likely, the children will have to be involved.
Having exclusively planned to be independent of their children, the YoYo parent comes a full circle and in some situations which are beyond their wishes or control, ends up relying on their adult children to take care of them. This is when the impact of the decision not to own a sufficient amount of whole-life and critical illness insurance will be felt the most as the intention to leave behind some form of financial legacy to the care giver/child may unexpectedly appear.
In my opinion, a good long term care plan has 2 parts – clarity and money. Having a lasting power of attorney done and specifying who is responsible for the personal well-being as well as financial management of your assets will provide clarity.
However, to have a better than average long term care plan, there must also be sufficient funding. Make sure that there are sufficient long term care funding through insurance such as ElderShield, ElderShield Supplements and Critical Illness insurance to make sure that the child or any caregiver you have appointed to take care of you will also have the means to do so.
This is especially so when you consider the next blind spot.
3. Reduction In Income When One Spouse Dies
If indeed the expectation is not to rely on children’s allowance for retirement, the planning for creating your own lifetime income must be carefully thought out and considered. The whole idea behind YoYo parenting is predicated on not burdening the children in the future and running out of money is a sure way to burden the children.
The importance of annuity planning in retirement should not be underestimated in retirement.
Consider the following projections from the Society of Actuaries in the US:
A 65 year old Male will have a 25% chance to live to age 93
A 65 year old Female will have a 25% chance to live to age 96
A 65 year old Married Couple will have a 25% chance that the surviving spouse lives to age 98
Considering that the average life expectancy in Singapore is longer than the United States by more than 3 years, you can probably add a few more months onto the projections above! Thus, the challenge for a married Singapore couple planning a joint retirement is to create an income stream that is sufficient to last until the age 98 at least.
A common problem that can occur is that both the husband and wife have income from annuity plans that are uncoordinated. This will result in a reduction in income when one spouse dies first. An extreme example of a situation like this will be a couple that is depending on the pension income from the husband. When the husband passes away, the wife will be left with no income at all as the pension income will stop.
In real life practical situations, I’ve seen couples who are planning for a “joint retirement” when only one of the spouse has the financial know-how, the expertise to manage money or in some cases, having retirement income tied to the survivorship of a particular spouse. This type of “joint retirement” planning may be true only as an idea but not in real life as the surviving spouse is still left to solve the retirement problem all by him or herself with half the resources available.
Consider Implementing a Real “Joint Retirement” Plan
Retirement is about having income and a joint retirement is about having income that will provide for 2 people and for as long as one is alive. Having retirement income that reduces or terminates upon the death of the first person is at best, an incomplete plan and at its worst, a plan only in name.
This is where joint-life annuity plans can and should be considered, especially for YoYo parents. There are very few such options available and joint-life annuity plans that provides a guaranteed lifetime income is even rarer. Yet, for the YoYo parents, it can be one of the most important type annuity in their joint retirement portfolio.
To learn more about how to plan for Joint-Life Annuity in your joint retirement plans with your spouse, you can schedule your complimentary 45 minutes consultation HERE.
Good luck and have fun as you build a truly independent YoYo future!
Article by Lee Meng
The writer is an Executive Financial Services Consultant representing GEN Financial Advisory