Time for tough love! Why even ‘rich’ retirees need to start thinking selfishly

Everyone is feeling the pinch due to the Covid-19 pandemic, and older Australians are not immune – especially those with grownup children who have children of their own and lavish lifestyles to uphold. Many such children, it seems, are increasingly pressuring their parents to finance living, education and lifestyle expenses that, until now, they had been able to cover themselves.

Last month a client told me that one of his children – who lost his job recently as a result of Covid-19 – was pressuring him to “release his inheritance” early, to enable the son to continue paying private school fees and a mortgage. My client asked if I had any advice.

My client and his wife are in their mid-70s, in reasonably good health and with $2 million in capital (a mix of shares and bonds). They’ve got three grown-up children and eight grandchildren. Like most retirees, my client’s income is dependent almost exclusively on dividends and interest received from investments. He is acutely aware that to be fair, what he gives to one of his children he should give to the rest.

The problem is that his investments are yielding far less than they were a year or so ago. Interest rates are currently very low and many big companies are reducing or deferring dividends.

Banks – which occupy a large percentage of many retirees’ portfolios – are a case in point. They have either deferred dividend payments or reduced them dramatically. Banks, particularly the Commonwealth Bank of Australia, have proven a gold mine for many retirees in terms of capital growth, but the income from dividends will now be uppermost in investors’ minds.

The reality is that retirees, many of whom have funded some or much of their children’s lifestyles, including help with mortgages and school fees, are facing increasing problems of their own, without taking on their children’s issues. The so-called ‘Bank of Mum and Dad’ – which has previously been happy to help adult children during the good financial times – is now suffering a little. And some adult children don’t like it.

A retired couple in their mid-70 with $2 million in the bank will need to consider the prospect of eating into that capital, perhaps for the next 20 or 25 years. Aged care is on the horizon, which may require $500,000 or more for a Refundable Accommodation Deposit (RAD, previously known as a bond) and recurring monthly expenses of between $5,000-$10,000.

The chances are that these clients weren’t assisted by their own parents – who were invariably raised in a tougher era – but for some reason have overprotected and, in many cases, indulged, their own children. Today’s unprecedented events can strain otherwise strong family relationships. We are only just beginning to witness some of the many legacies of Covid-19.

In addition, for many years the must-have-now generation has taken on unrealistic amounts of debt in order to fund their lifestyles, a problem has been flagged often by the Governor of the Reserve Bank of Australia, who has counselled people to reduce debt.

A recent warning from the Commonwealth Bank – Australia’s biggest home lender – that Australians face a potential 32 per cent drop in house prices as part of a ‘prolonged’ economic downturn will not help borrowers’ states of mind. It may push many borrowers into negative equity positions.

A grown-up child with a mortgage, school fees to pay, possibly a leased vehicle or two – with no salary income stream due to Covid-19, or possibly having had a severe pay-cut – is a sorry story, but one that, simply, the child needs to sort out. Many children are realising that it doesn’t take much for outgoings to exceed income.

My advice to my client was the following:

• Don’t be pressured into bailing out your child; now is the time to think about yourself first.
• Delay decisions until the key companies in your portfolio have reported, enabling you to get a handle on your likely income stream.
• Suggest gently to your children that they may need to alter their lifestyles.
• Be wary of panicking and selling shares after the market has fallen sharply.
• Remind your children that what you do for one of them, you must do for all of them.
• Consider a mediator.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.