Many retirees have not saved enough to meet their financial needs, leaving children with the burden of supporting their retired parents.
A retirement survey by Sanlam found that 51% of retirees cannot make ends meet, and one-third do not have enough money to cover their medical expenses.
This could be due to insufficient retirement savings or not preserving retirement benefits when changing jobs. Whatever the reason, the fact remains that 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 ten 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, need to support their parents financially.
By having the conversation at the beginning of retirement, ideally together with a qualified financial planner, agreements and expectations can be put in place. This allows the children to plan their own finances accordingly.
It would be less of a financial strain for the children to supplement a percentage of their parent’s needs from the start of retirement, allowing the retirement benefit to last longer, than waiting for the retirement 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 and needs.
Financial planner James Vigne of Villic Wealth says it requires an honest conversation about what is affordable.
“Consider having frank, sometimes difficult, conversations as a family to discuss their standard of living and how you could potentially help, given what you can afford. Have conversations around where they should live, their assets, vehicles, and what they need to live off. Work together to make adjustments and set up a gameplan. This can be tremendously beneficial because it allows both parties a clear understanding of what the expectations are.”
Understand the tax consequences
You must also be cognizant of the tax consequences of any support that you provide your parents. For example, you might want to give them a large lump sum which they could invest and then live off the interest. This has the advantage of giving your parents a level of independence, so they don’t feel like they have to ask you for money each month.
Vigne says giving a lump sum is not ideal. Firstly, you must trust that it would be use 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 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. You may only donate a total of R100 000 per tax year tax free (regardless of whether you donate to one person or several – that R100 000 is the total that you can give tax free). Donations tax is applied to any amount over R100 000.”
There are certain donations which are exempt from donations tax, such as a donation made to a spouse, but there is no such exemption for a donation to a parent. That means that your generous gesture could result in your owing SARS 20% in donations tax.
Vigne says you could use the R100 000 tax-free donation each year to, for example, pay off the outstanding balance on their vehicle or a portion of their remaining home loan.
A better approach would be to pay directly for some of your parents’ expenses. Any bona fide contribution made by a donor (you) towards the maintenance of another person is exempt from donations tax.
Vigne does warn, however, that for the maintenance payments to be tax exempt, SARS would need to consider them ‘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 are 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’s advice is to start with taking over their most important expenses, while being conscious of your own affordability.
- Medical aid: In retirement, medical aid is often a substantial expense but also one of the most important. Consider adding your parents to your own medical aid if you consider them financially dependent on you.
- Insurance: Insurance protects your and your parents’ livelihood. 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: You could buy 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 soon or have 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.
This article first appeared in City Press.