If your parents are getting older, you may have to assist them in various aspects of daily life — one of which may be their investment strategies.
By being proactive, you may be able to make things easier for your mom and dad in their retirement years.
One of the best things you can do for your parents is find out if they’re investing in an appropriate way for their situation.
As many people age, they tend to become financially conservative, choosing investments that offer significant protection of principal, such as certificates of deposit and U.S. Treasury securities. This is understandable, because your parents, like many at their stage of life, probably don’t want to take financial risks.
By taking no chances with money, they could be taking on more risk than they think.
Why? Because by investing conservatively, they might not be able to afford the lifestyle they’ve chosen, given the importance of two factors: longevity and inflation.
Let’s consider longevity first. The average 65-year-old man is expected to live 16.5 more years, while the average 65-year-old woman has 19.1 more years of life expectancy, according to the Social Security Administration.
And these figures are averages, which means that half of all men and half of all women can expect to live longer than 81.5 years and 84.1 years.
Your parents could easily spend two or three decades in retirement. And if they’re investing predominantly in fixed-income vehicles, their returns may not keep up with inflation.
Suppose your parents’ total cost of living is $80,000 per year. If inflation were to average 3 percent annually over the next 20 years, your parents would need more than $144,000 per year to maintain their standard of living.
Given the possibility of a long retirement, combined with the cumulative effects of inflation, your parents will likely need some growth potential in their investment portfolio.
A reasonable percentage of quality stocks may provide them with that potential, but their mix of investments really depends on their individual needs, lifestyle choices and risk tolerance.
Here’s another question: How much should they take out each year from their 401(k) and IRA? It’s essential that they neither withdraw so much that they deplete their accounts nor so little they can’t afford things.
Because the ideal withdrawal rate depends on several factors — among them are investment mix, risk tolerance, life expectancy and other sources of income — it’s not always easy to determine the appropriate amount.
You might not have the expertise to help your parents address these two issues. And that’s why you may want to encourage your parents to work with a financial adviser. At their stage of life, they need to make the right moves with their money.
Scott Flake is a financial adviser with Edward Jones. He hosts a weekly investment discussion at 10 a.m., Tuesdays at 411 S. Beeline Highway, Suite B. For more information, call (928) 468-1470.