How to Tell Your Parents They’re Ruining Their Retirement — and Yours

Biggest Retirement Mistakes

In the past year, there has been an exuberant amount of coverage on soon-to-be retirees who have insufficient funds to support themselves in retirement — and for good reason.

GOBankingRates’ 2015 Life + Money survey found that 20 percent of people say planning for retirement is their biggest financial challenge. What’s more, according to the Schwartz Center for Economic Policy Analysis, “55 percent of households in which the head of the household is near retirement age (55-64 years old) will have to survive almost entirely on Social Security income or will not be able to retire at all due to negligible savings.” Depending on Social Security is risky since the future of Social Security is questionable.

If your parents are nearing — or are currently in — retirement and don’t have enough money saved, who’s going to supplement their retirement? If it’s not coming from their own retirement savings or from the government, then it might be up to you to step in and help out.

Related: How Boomers Can Avoid Becoming Financial Burdens on Their Kids

Your Parents’ Biggest Retirement Mistakes Will Cost You

Unfortunately, the biggest retirement mistakes cost everyone money — not just the retiree. In a recent TD Ameritrade study on financial supporters who support their adult children and/or parents, 39 percent of Gen Xers and 39 percent of millennials have delayed saving money for retirement. One-fifth of Gen Xers and millennials are financial supporters, and millennials have spent an average of $18,000 in the last year to provide financial support.

Christine Benz, Morningstar‘s director of personal finance, said many with low retirement savings have to turn to family for help:

“It’s an unfortunate reality that many people who have not saved enough or invested wisely for retirement could need to lean on other family members at some point. Parents may need to lean on their children for financial support, or move in with them because they can’t afford to maintain a separate household, for example. That can put a financial strain on the children, too.”

That financial strain makes it harder for children to plan and save for their own retirement as well as other financial milestones. The TD Ameritrade survey found, for example, that 48 percent of millennial financial supporters have delayed buying a house.

Read: How to Support Aging Parents During Retirement

The best way to tackle this problem is to plan for your own retirement properly — and to help your parents avoid or fix common retirement mistakes:

Retirement Mistake No. 1: Your Parents Are Spending Too Much

“When it comes to in-retirement mistakes, this problem crops up: People spend more than their portfolios can actually support,” said Benz. She suggests that parents use the 4 percent guideline: “If you can’t live on 4 percent of your portfolio in the first year of your retirement, then you should think about pushing your retirement date back a bit.”

Although she cautions that the 4 percent guideline isn’t foolproof, it’s not an unreasonable starting point when trying to figure out how much a retiree can take out.

How to help your parents:  A good idea for parents that want to review portfolio nuances and stay in the retirement loop is to take part in online seminars. Wells Fargo, for instance, hosts free seminars on a variety of retirement topics, such as “Navigating Your Path to Retirement” and “Budgeting Strategies for Better Financial Health.”

Retirement Mistake No. 2: Your Parents Are Getting Conflicted Investment Advice

More than 40 million American families have savings of more than $7 trillion in IRAs, according to a report from the White House’s Council of Economic Advisors (CEA).  Managing IRA investments can be challenging, so many Americans turn to advisors for assistance.

However, this is where the problem lies. Because financial advisors are often compensated through fees and commissions that depend on their clients’ actions, the best course of action for the retiree might differ for the advisor. The advisor might have “acute conflicts of interest,” which can hurt your parents financially. The CEA report found that conflicted advice leads to lower investment returns, and the aggregate annual cost of conflicted advice is about $17 billion per year.

How to help your parents: To help your parents avoid conflicted advice, it’s advantageous for you or your parent to get familiar with IRA best practices and to find a trustworthy financial advisor. Let your parents know that you’re willing to help research advisors and find one suitable enough to match their needs.

Retirement Mistake No. 3: Your Parents’ Portfolio Has Wonky Asset Allocation

“Young folks may be too conservative because they’ve seen what their parents have gone through with the volatile stock markets of the past few decades,” said Benz. “Meanwhile, people getting close to retirement are often too aggressive and stock-heavy with their allocations.”

On the other hand, a too-conservative portfolio that’s heavy in cash and bonds and not stocks can actually increase the long-term risk while keeping volatility down in the short-term.

How to help your parents: To avoid having an uneven portfolio, your retiree parents need to focus on asset allocation. But using general rules of thumb — such as, “equity exposure should decrease as they age” — won’t always do the trick.

“Using age-based guidelines to allocate portfolios won’t properly factor in individual retirement income and actual living expense,” said Charles F. Millington, a certified financial planner (CFP). Instead, he suggests a two-pronged approach by simply figuring out your parents’ annual personal retirement income stream compared to their anticipated annual retirement costs, excluding one-time major home repairs and other major purchases.

“If your expenses exceed your income stream, then that difference will need to be made up by your investments,” said Millington. Your parents will then know if they should focus their attention on principal preservation or growth.

Keep reading: 10 Best Stock Market Strategies for Baby Boomers

Retirement Mistake No. 4: Your Parents Waited Too Long to Start Saving

“By far the biggest mistake that people make is waiting too long to get serious about saving for retirement,” said Benz. If your parents don’t have any retirement savings, they need to start saving as soon as possible. If they have a retirement savings account, such as a 401(k), help them put it to work.

How to help your parents: “In my opinion, everyone — no matter their age or circumstances — should contribute enough to at least capture any company match if that’s available to them. That automatically puts extra dollars in your pocket,” wrote Carrie Schwab-Pomerantz, CFP and president of Charles Schwab Foundation.

Sit down with your parents — and perhaps a financial advisor — to figure out how much they need to contribute to their 401(k) in order to receive the full employer match.

If your parents made any of these common retirement mistakes, don’t stress out too much. “From an investing perspective, retirement is not an end goal; it’s really the start of a new phase in your life,” said Millington. This phase that could last 30 to 40 years, which means there is time to correct errors. Figure out why your parents are investing and what they are saving for. Once that’s done, sit down with a trusted advisor and restructure their retirement plan.