Running the Show for Mom and Dad
With many middle-aged Americans juggling the needs of saving for retirement and paying for their children's college education, it's easy for them to miss another ball in the air — providing for aging parents.
From talking about long-term care plans to completing important legal documents and making sure the nest egg stays well-maintained, there's plenty to think about — and the sooner the better, experts say.
This group, often referred to as the “sandwich generation,” may be the first to care equally as long for parents as for children, according to the Coalition on Family Caregiving.
One in eight Americans between ages 40 and 60 is raising a child and caring for a parent simultaneously, according to the Pew Research Center.
Senior citizens, however, are probably more willing to accept a little advice than seniors in high school. Helping aging parents be as prepared as possible for the next stages of their lives can go a long way toward creating harmony for the whole family.
Start the Conversation
Talking with aging parents about topics like long-term care and living wills is never easy, but it can eliminate a lot of headaches if done before a crisis hits.
Ray LeVitre, certified financial planner and author of “20 Retirement Decisions You Need to Make Right Now,” says making a plan for physical and mental deterioration and discussing parents’ wishes with them while they are still “mentally there” will save a lot of stress and ill feelings down the line.
Once you’ve determined the kind of care parents have in mind, the next step is figuring out how to pay for it.
Dive Into Your Parents’ Finances
“Understand your parents’ cash flow situation — their income, their expenses,” said Chris McDermott, a certified financial planner and senior vice president of retirement and financial planning at Fidelity Investments. “One of the things we typically talk about is real estate.”
McDermott says many retirees look at downsizing their home as an opportunity to minimize expenses and unlock potential equity, noting that the proceeds can often supplement retirement income.
Sometimes scaling back can also help seniors simplify by not having as much to maintain. David Chmiel recently helped his dad, an octogenarian, relocate.
“Our Mom passed away two years ago and we were concerned about Dad, but it was never about finances,” said Chmiel of Maplewood, N.J. “He wanted to stay in the family homestead, which is a big old three-story house. He just turned 80 and we were worried it would be too big and worried about him on the stairs. But he's active and fit and it wasn't an issue.”
Still, Chmiel says, when his father decided it was time to sell, “it was a great relief.”
Can Mom and Dad’s Portfolio Pass a Stress Test?
LeVitre recommends reviewing all possible sources of income, including Social Security, pensions, rent, portfolio withdrawals as well as pension and survivor benefits when both parents are alive.
The financial planner says he likes to put his clients’ portfolio through a financial stress test to determine if current assets can provide for parents during the remainder of their lives, and if their nest egg could support one parent in a nursing home and one parent living outside a nursing home. If the funds aren’t there, it’s time to make some adjustments.
Don’t Underestimate Medical Costs
According to Fidelity's latest retiree health care costs estimate, a 65-year-old couple retiring this year is estimated to need $240,000 to cover medical expenses throughout retirement, up 4 percent from 2011.
“The cost of long-term care on average annually is $90,000,” McDermott said. “That’s not built into that $240,000 so that stresses the importance of getting ahead of this.”
McDermott recommends getting familiar with parents’ Medicare coverage and finding out whether or not they have any supplemental coverage or prescription drug coverage. He says it’s important to understand where the gap is, if one exists, as well as what risk parents could face should they require an extended hospital stay.
“It’s projected that 70 percent of people over the age of 65 require some type of long-term care at some point in their lives, and the reality is that Medicare is not going to cover that,” McDermott said. “Individuals should think about whether or not they need long term care coverage and what type of insurance they need and how much coverage they need. The earlier they do that the better.”
Paper Chase
Get Legal Documents in Order
As elders begin to slow, LeVitre says, there are two kinds of powers of attorney that are “crucial.” He recommends a general power of attorney for those who can no longer make financial decisions. A POA also helps when a parent is physically unable to take care of his or her expenses without assistance.
“This person can go to the bank and make sure the bills get paid,” said LeVitre, who noted that adding an adult child to a bank account can also be helpful when it comes to taking care of day-to-day business.
A health care proxy or medical power of attorney allows you to name someone you trust to make medical decisions on your behalf if you can’t do so yourself.
In addition, LeVitre says, getting yourbeneficiary information squared away in every possible account is also key because it “trumps everything else, including a will.”
When considering parents’ assets, LeVitre recommends using a spreadsheet to help stay organized. Begin by taking an inventory of assets, liabilities and insurance and determine how each is titled. Also be sure that each has a designated beneficiary.
“You can get a lot of estate planning done without even seeing an attorney,” he said. “The beneficiary form doesn’t cost you anything except maybe some time. I recommend trying to do as much free estate planning as possible.”
Fidelity's McDermott recommends parents as well as adult children get the following documents in order:
• A will specifying your wishes, including how you want your property distributed and who will administer your estate. For adult children, this document will also specify who will care for your minor children.
• A living will/health care directive specifying what, if any, life-saving measures should be taken if you become terminally ill or incapacitated.
• A trust allowing you to pass assets to your beneficiaries without the delay or expense of probate, as well as impose certain conditions. You appoint a trustee who is responsible for managing, investing and distributing the assets held in the trust.
Assisting parents to get their affairs in order can be a good primer for adult children. Chmiel said helping his father navigate his recent real estate transaction made him realize he needs to put more time into his own plans.
“Financially, Mom and Dad were good planners,” he said. “Dad's an accountant, so his estate and paperwork always has been in place. I think the lasting takeaway for me is making sure that I'm more buttoned-up about all these topics, from making sure our wills are in order to getting organized.”
Nest Egg Maintenance
Many seniors make the mistake of thinking they need to be extremely conservative with their savings, but considering today’s retirement can last three decades, they need “sufficient stock exposureto get adequate growth” and “keep pace with inflation,” McDermott said.
Help parents position their nest egg based on when they will spend their money, LeVitre advises.
“Money that will be withdrawn and spent in the next two years, invest in cash instruments,” he said. “Money that will be withdrawn and spent in years three through 10, invest in bonds. And, money that won’t be spent for 10-plus years invest in stocks.”
He also recommends buying only no-load financial products, meaning those without commission or back-end charges when the investment is liquidated and working with a fee-only financial adviser.
Don't Forget You!
Before deciding if they’re in a position to help either growing kids or aging parents, adult children need to first get their own finances in order, McDermott says.
Get a plan in place that includes taking advantage of workplace retirement savings, in which participants can save as much as $17,000 per year tax-deferred. Other employer benefits, such as flexible savings accounts and dependent care accounts, can also help save as much as possible, he says.
People with a financial plan tend to have twice as much money as those without one, LeVitre says.
No matter what your age, figuring out your finances at every stage puts you way ahead of the game, experts says.