Thursday, 21 July 2016

Are my parents ready for retirement?

I read an interesting post from this US personal finance blogger (Broke Millenial) - Are You Your Parent's Retirement Plan? It sets out conversation topics on insurance, retirement funds, mortgage and debt that adult children can consider having with their parents to better understand their retirement plans.

This got me thinking about my parent's retirement plans and whether they are financially fit for retirement. I have had conversations with my parents about this before to see where I can assist them in their financial planning for retirement.

We usually end up discussing the sufficiency of the CPF Life payouts after taking into account the other factors of insurance, active & passive income and debt. That might be how I will write this post for a more complete financial analysis of my parents' retirement plans.
1. Insurance

My parents have health insurance plans that cover for hospital and surgical expenses. Although these health insurance plans are not the most comprehensive, the annual premiums to be deducted from their Central Provident Fund (CPF) - Medisave Account (MA) are quite high due to their age (60+).

In fact, the annual premiums are expected to increase as my parents get older and my siblings & I might have to top up their CPF - MAs or have the withdrawals come from our CPF - MAs instead. Medical costs from hospitalisations and emergencies can be a significant drain on the family finances when not managed well. My parents are relatively healthy for now due to their active lifestyles but we will continue to budget for their medical expenses.

My parents used to have term life insurance policies but they have since expired. I'm not sure how useful life insurance policies will be for my parents now that they no longer have any dependants. My siblings & I can take care of ourselves and will look after them financially as well.

2. Active Income

My dad stopped working a few years ago and has since moved to Malaysia. He built a house on top of a small piece of family farmland that we have and grows a variety of fruits & vegetables while rearing a few chickens. He also catches fish from the farm drainage canals and ponds when there is heavy rain.

Having lived for a number of years on a farm in Malaysia when he was young, my dad really likes this lifestyle and I'm glad he gets to enjoy it in his retirement. Although my dad no longer has any active income, his expenses are low since he only spends on necessities (i.e. items that he can't grow on the farm like rice and other meat produce).

Since the cost of living in Malaysia is much lower than Singapore and my dad is a lot happier and healthier from the manual labour tending to the farm, his expenses have gone down over the years. He comes out to Singapore to visit us or we go in to Malaysia to stay with him on the farm once in a while.

My mum works as a retail promoter a few days each week and is paid monthly based on the number of hours worked. It's not a strenuous job and she gets to interact with her colleagues and customers. The active income helps to pay for the travel trips my mum goes on with us or her friends.

I have to admit that this is not a normal or common living arrangement for most families out there. However, it has worked out well for my parents because both of them get to enjoy doing the things they like. This is especially so when you have adult children living their own lives so everyone gets to spend quality time with each other when we get together.

3. Passive Income

My parents own a residential apartment in Malaysia that is about to be completed and leased out. Since they did not take out a mortgage to pay for the apartment and had enough cash to purchase it, the rental income net of rental expenses will constitute passive income to sustain my dad's lifestyle on top of their savings in Malaysia.

If money gets tight due to unforeseen circumstances, my mum can rent out a room in the family apartment in Singapore (where the housing loan has been paid off) for additional rental income on top of their savings in Singapore.

Since my parents do not have an investment portfolio of equities and bonds, they rely a lot on the CPF Life payouts as their main source of passive income. I never realised the importance of CPF Life until I see its payouts sustaining my parent's retirement.

Even though my siblings & I make monthly contributions to my parents and manage their living expenses, these CPF Life payouts provide a strong layer of support. It's usually the dual impact of reduced income and increased expenses that cause financial problems in retirement. Hence the need to find ways to maintain the income while reducing expenses.

4. Debt

This section is going to be short because one of the best things my parents have done financially is not to have any type of debt in retirement. No mortgage, no student loan and no credit card debt.

Although my parents did not manage to build an investment portfolio of shares and bonds, they have put themselves in a strong financial position to retire by managing their income and expenses. Their lifestyle does not consist of luxury spending but they get to enjoy doing the activities that make them happy. That's all I can ask and wish for in my parent's retirement.

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