If Your Parents Are Retired, You Must Read ThisDec 31, 2023
Hello Stoic Investors,
Hope you enjoyed your Christmas holidays!
Today, we're going to talk about how to manage and safeguard your parents' retirement investments.
If your parents are over 60 and you know they have some investments, maybe with a financial advisor, then you need to read this.
I'm going to talk about what happened to one of my student's moms with a financial advisor and the lessons we can learn from this. This feels very personal to me because my parents went through the same thing.
By the same thing, I mean trusting someone else almost completely with your assets, the money that you earned maybe over different decades.
And given that you don't know how to invest yourself, you get help from someone else like a qualified financial adviser, which should help you, right? Well, the reality is that, as I always say, you are the only person who wants the best for your money.
Unfortunately, the example I'm going to show you today confirms these things once again.
So let's jump into the topic.
What Happened to One of My Students’ Mother
One of my students from my coaching program asked me to have a coaching call with her mom, who had a financial advisor for several years. In 15 years of investments, her money did not grow at all.
We're talking about 15 years in which we had one of the biggest growths in the stock market. Making no money at all is just crazy.
Aside from this, we started to look into also a bit more of what is the type of contract that this financial advisor had with her mom, her retired mom. He got a 2% annual fee as a role of advisor. So basically, you paid someone 2% to make you a 0% return.
Why does this happen? Because, for example, if I have 100,000 invested with a financial advisor and he gets a 2% fee, it means that he gets $2,000 whatever happens every single year. And so he will make this amount without any reason to be motivated to make a good result because it doesn't matter whether you make money or not, as long as he's able or she's able to tell you certain reasons why you're not making money.
As long as they can take advantage of your lack of knowledge, they are making this amount.
Financial Advisors Can Easily Take Advantage of Senior Clients
Many financial advisors target senior clients, particularly those aged 70 and above, due to their general lack of interest or ability to manage investments independently. This can lead to exploitation through high and hidden fees.
A survey by Russell Investments in the UK revealed that 46% of UK advisers claim that 20% to 50% of their clients are age 70 plus.
Financial advisors often focus on senior clients because they can charge higher fees without much scrutiny. This lack of financial literacy among senior clients translates into higher hidden fees at multiple layers; for example:
- Financial advisor fee
- Funds fee
- Entry fee
- Exit fee
- Admin fees...
So, you have the financial advisor fee, which in the example was 2%. You have the funds fee, which certain funds can even charge you 1-3% per year. So, it's a cumulative 3 to 5% already loss every year. Then you have entry fee to access the fund, exit fee to exit the fund, admin fees to have a certain account with a certain broker company. There are so many ways that they can charge you money.
And this is just a couple of lists of fees that a financial adviser can charge you if you don't know what you're doing and if you are trusting someone else completely, which is why I say multiple times that it's very important that you learn to invest yourself because you are the only person that wants the best for your money.
This is why I prefer to teach my students to learn to invest rather than managing their money.
3 Things You Can Do Right Now to Help Your Parents (and Your Inheritance)
1. Review Their Investment Portfolio:
The first step is to sit down with your parents and have a clear look at their investments. This might be a difficult conversation for some, but it's crucial. If your parents have various assets, it's important to start talking about these things early on.
I've seen it firsthand; my father was frustrated with the ups and downs of his investments and didn't understand why they were happening. He was really relieved when I offered to help, as I have a strong interest in investing. You can offer the same help to your parents.
Begin by understanding their current financial situation. Then, compare their investment returns to the general market, like the stock market. Their returns might be lower, especially if they're older and have a more conservative investment strategy, but they should still be seeing some return, not 0%.
2. Calculate Their Retirement Needs:
Next, figure out how much money your parents will need for their retirement and see if their investments can cover it.
For example, if your parents need $4,000 a month in retirement and $2,000 of that comes from a public pension, then the remaining $2,000 must come from their investments. Let's say they have $500,000 invested. To get $2,000 a month, or $24,000 a year, from these investments, they would need about a 5% annual return. This is quite achievable.
If you can help your parents, or if they can manage their investments to yield a 5% return, they'll be able to draw this amount regularly without depleting the principal sum.
This way, they can remain financially secure until the end of their lives, leaving a substantial amount behind for emergencies or inheritance.
3. Set Up Everything to Avoid the Death Tax:
Third, it's important to arrange your parents' finances to minimize inheritance or death taxes. In many countries, especially in the European Union, assets are taxed when someone passes away.
Instead of waiting until the last moment, consider making arrangements in advance. This could involve making donations, transferring certain assets, and planning who will inherit properties or investment portfolios.
Taking these steps early is crucial.
For example, in some countries like Belgium, the death tax can be as high as 40%. This means if your parents have $500,000 in investments, $200,000 could go to the state in taxes.
So, it's wise to look into these matters sooner rather than later to save a significant amount of money.
It's super important to keep an eye on how our parents' retirement money is managed.
Like I talked about with my student's mom's story, trusting financial advisors without checking in can lead to no growth and high fees.
We need to get smart about money stuff and make sure any financial advisor is really working for our parents' best interests, so we can help our parents have a financially secure retirement and also look after our future inheritance.
It's all about making sure our parents' hard-earned money is taken care of the right way.
So, Note Down These Points and Start Investing Today:
1. You are the only person that wants the best for your money.
2. Educating yourself financially can protect you from unnecessary fees and exploitation.
3. If you want a Financial Advisor, choose someone whose fees align with your investment.