Making Wise Financial Decisions for Aging Parents
I’ve written at length about the unfortunate ‘trifecta’ which many families face when in their 50’s. This decade is typically when people really start to focus on the reality of retiring one day and having enough money to do so. It’s also a time when kids (if you have them) are in college or are nearing that expense. It’s also a time when elderly parents often need help. Offering help to aging parents isn’t always financial in nature—it can also be an increased need for time and attention which takes mental and financial tolls on you. No matter how you look at it, your 50’s are a time of financial demands, perhaps more so than any other decade. So below I’ve outlined a few financial tips regarding dealing with aging parents which can potentially save you loads of money (and stress) down the road.
• Watch those insurance policies – It’s generally around the time that people’s policies are really becoming valuable that they often stop paying premiums. People in their 70’s and 80’s sometimes decide their kids earn a decent living and they can simply drop their life insurance. If you run some cost/benefit analysis of paying another 10-15 years of premiums vs. what the eventual payout will be, it’s often worth it for the kids to continue making those life insurance payments if their parents aren’t able to do so. Why let the insurance companies win by collecting your premiums and paying out nothing? Keep those policies in force. The same cost/benefit analysis can apply to Medicare supplement programs (i.e. Medigap) and long-term care insurance. Any of these policies can avoid having to drain substantial assets later on in life when you’re grappling with other expenses at the same time. Do a little careful planning today and save yourself a bundle tomorrow.
• Go over your IRA accounts with a smart financial advisor – I’ve seen many cases where elderly people are taking Required Minimum Distributions (RMDs) from their IRA accounts each year. In many cases this, combined with social security, is their only real income. As a result, they are paying tax on their IRA distributions at extremely low rates, often under 15%. If a child inherits that IRA who is in the 35% tax bracket, they will end up paying the government more tax than their parents would have. My point is that it may make more sense for the parent’s to take substantial distributions and utilize the $13,000/person/year gifting ability. This sort of income distribution analysis may be worth going over with your financial advisor.
• Protect the family home – Elderly folks tend to spend through much of their cash. However, it’s a bit more difficult to spend your house since it’s typically an intangible asset. It’s important to plan the succession of that home while your parents are still alive. That may involve transferring the home into a beneficiary’s name while they are still alive to avoid probate issues. If running out of cash is the issue, helping your parents obtain either a home equity line of credit (HELOC) or reverse mortgage prior to them asking you for money may be a good idea. Obviously you’ll want to do your homework carefully—especially in the case of a reverse mortgage because it involves selling all or a portion of your home back to the bank. In some cases the only planning which needs to be done is establishing a trust to maintain family home into the future. This saves the headache of kids arguing over maintenance and repair issues which often come up shortly after home ownership transfers.
Aside from the above tips which may not be totally obvious, it’s also good to make sure parents have a reasonable budget. I’ve noticed a lot of elderly folks run out of money because they take less interest in their money at a time when lots of random and unexpected expenses tend to come up. If your income is coming from a pension, social security, and retirement account distributions, you should be able to accurately predict your income each year. Children should work with their parents to make sure they are living within the framework of their fixed and variable income.
As always, feel free to reach me with any questions.
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