I was having a discussion with my parents about their retirement plans and cash flow requirments - and basically it came down to us concluding that their cash flows from pensions and other non-investment income would be more than enough to meet their needs and any income that their investments earned would be gravy on top of that.

I suggested that, given the income from the investments was not needed, there shouldn't be any problem with them spending their nest egg over time if the need arose.

Well, that was a mistake - I had to listen to a huge rant from my mother about how they should never spend any of that money because it was my and my brother's legacy.

I am a chartered accountant and I like to think that I make a pretty good living and chances are I will continue to do so. My only sibling is currently in university, is very intelligent and fairly hard working (at least for a computer science major ;) ) and I assume that he too will be financially independent. Neither of us show any signs of finding anyone of the female persuassion that is foolish enough to want to put up with either of us on a long term basis.

My suggestion that we can provide for ourselves and that I would rather them have more to spend on luxuries during their golden years did not go over well with my mother.

I have heard similar arguments from many of my clients over the years and for the life of me I have never been able to understand parents who insist that their capital remain untouchable so that it may all be given to children who are doing quite fine on their own. I don't know if this is only a crazy Canadian phenomena but I would be interested to hear if it is normal elsewhere.

So I want to know what do you think. Are my parents being irrational or do they have some sort of strange obligation to spend only the income on their investments and leave the capital as a legacy?

[ November 02, 2004, 04:40: Message edited by: JSBB ]

Poll Information
This poll contains 1 question(s). 13 user(s) have voted.
You may not view the results of this poll without voting.

Poll Results: Encroaching Upon Capital (13 votes.)

Encroaching Upon Capital (Choose 1)
* They are being irrational and should feel free to spend their savings if need be. - 77% (10)
* They are correct and have an obligation to leave their capital as a legacy.. - 23% (3)

I voted for the second option, not because I think they have an obligation to leave the capital as a legacy, but because I believe that it is a more sound financial strategy to not spend your investment capital. This would provide a safety net if anything happened to their other sources of income (e.g. their pension fund went bust, they needed expensive medical care, some fundamental unexpected change occurred to the economic environment etc).

This money would also help to provide for their funeral and other expenses that are often borne by the surviving children.

If they are certain that they want to leave this money to their children then there are probably more tax-effective ways of passing it on than waiting for you to inherit it. They should probably set up some sort of trust or use their tax-free gift allowance to minimise inheritance taxes.

Then, if you decide that you'd rather they benefited from the money, you could use some of your considerable income to shout them a holiday in the Bahamas or buy them an X-Box or something. Then everybody wins!

When I reach that stage in life, if I am lucky enough to have built up sufficient investment capital to provide for my own retirement, I certainly do not intend to spend it all on luxuries once I retire.

I also ended up voting for the second option, tho I would have prefered "They are correct, though they should feel free to spend the money if they need to." Perhaps because I wouldn't want to suggest that your parents are irrational. I suppose it *would* be irrational if they were putting themselves through undue hardship. But I'm assuming from what you've written that they have a style of living that they are comfortable and satisfied with, and might even feel uncomfortable, frivolous, wasteful etc., to be spending more. Sometimes people feel less happy when they have more money to spend, and it's no use trying to get them to travel around the world when they'd rather garden at home and read a book.

...or buy them an X-Box or something. Of course, you should really buy them a PlayStation so they can play Grand Theft Auto: San Andreas...

If they are certain that they want to leave this money to their children then there are probably more tax-effective ways of passing it on than waiting for you to inherit it. They should probably set up some sort of trust or use their tax-free gift allowance to minimise inheritance taxes.
Generally speaking there are no inheritance or gift taxes in Canada. The closest thing we have is some probabte fees but these are generally quite easy to get around.

I have a number of problems with absolute rules about not spending capital. When I talk about luxuries I don't mean going around buying his and hers sports cars or things like that but instead I mean having the money to buy better food, living in a nice home (normal or retirement), being able to hire someone to do labour that would otherwise be physically punishing to the elderly, replacing the air conditioner when it breaks etc.

Not that I'm implying that any of the above would actually apply to my parents, as far as I can see they should be able to live very comfortably in retirement without any investment income or encroaching upon capital.

I will use a very sad example based upon what one of my clients insisted on doing. My client became physically infirm and had to go and live in a retirement home. She insisted on going into one that her pension would cover instead of spending some of her capital and going into a much better home where she would have been much more comfortable and receive far better care. Her savings, which were conservatively invested and thus earning next to nothing with the current interest rates, would have been enough to pay for the upgrade to the better home for over fifty years with more than enough left over to pay for her funeral. Personally, I would be furious if my mother insisted on checking herself into the lower cost home to ensure that my legacy was untouched.

[ November 02, 2004, 05:39: Message edited by: JSBB ]

I still think they can choose to not spend the money if that's what makes them feel better. As Bion says, the good feelings they might get from not spending their money might exceed the marginal utility gained from spending it. You can't get furious at your parents for that. If you feel so strongly about it then take them out for a nice dinner on a regular basis. Then they'll feel good for not spending their money and you'll feel good that they are eating nice food.

I am not saying that they should have to try to spend their savings, but rather they should be willing to entertain doing so if they need it to maintain their standard of living.

It makes sense to keep a nest egg but to treat it as untouchable regardless of what happens does not make sense to me.

@JSBB

I agree completely with your sentiments on this. While I think it is irrational for people to outright refuse to dip into their nest egg, parents have an unending devotion to their children, and feel like they NEED to do this, even if you and your sibling are financially secure. My personal opinion is that when my parents retire they should not feel obligated to leave me any money beyond what it takes to cover the cremation expenses (they both state they wish to be cremated). My personal feeling is that my parents have raised me and provided for me throughout the first 24 years of my life (until I finished graduate school) and that they have done enough. I certainly don't feel that I deserve anything more from them, and feel that they should spend what they like on themselves once they reach retirement age.

Then again, like you JSBB, I'm financially secure, and saving for my own retirement. Perhaps if I was just squeaking by with no long term savings, I would greatly look forward to receiving a larger inheritence.

I think it is only natural for a parent to want to be able to leave assets to their children.

JSBB, Velcro and I say the same thing our parents all the time - we'd rather see them enjoying their money now than receive it in their wills.

But if your parents are anything like mine and many others of that less consumption-oriented generation then they will not get much 'enjoyment' from spending money. They seem to enjoy being frugal, pottering around in the garden, and indulging their grandchildren.

I voted for the first. My nan gets a VERY good pension allowance, since my grandfather had a good job. She's going to leave a fair sum, and that's the problem. She thinks that because she will be leaving money to us, she should be the centre of attention all the time. And holds it over us like it's power. Personally, we dont care. We just want her to be nice, and enjoy her life. Keeping the money back seems to give her a feeling of power. I think it's nuts, as do the rest of my family.

Now, I know some parents do it for selfless reasons, but in either case, I think it's daft. Enjoy the money. Leave it up to the kids to make their way. If their lives become dependent on getting a nest egg pay out, then that will have become apparent long before.