Unless you’ve spoken to your parents extensively about their finances, almost everyone thinks they will have to support their parents in some way in the future (housing, health, caretaking, or finances). In fact, 4 out of 5 millennials and generation x-ers worry about having enough money to support themselves and assist their parents according to a 2020 study by GoHeath — which runs Encompass a digital Medicare platform. But based on my experience working with clients and doing supportive reviews of their parent’s finances, assuming you’re going to suffer financially to help your parents isn’t a given. It’s probably not as bad as you imagine, most families have more resources that you think.
One challenge with looking at your parent’s finances compared to your own financial planning knowledge is the numbers are a lot smaller. What your parents have saved for retirement and the amount they will be living on in old age is naturally going to be a much smaller number than what your financial planning will dictate. Why? Because of inflation. If you’re parents only have $250,000 saved today that would be nearly $600,000 in 25 years (accounting for typical 3.5% inflation). If you’ve done your own retirement planning you know that your retirement savings is going to need to be hefty to cover your expenses. But your parents won’t have to endure a full 25 years of inflation BEFORE they retire. They’re close or already at retirement. This means the amount of money they need to have saved is going to be 25% to 50% smaller than what your targets look like.
Luckily social security payments, and often pension payments (if your parents have access to them) are inflation adjusted each year. Plus if they have a nest egg saved whether it’s in stocks, bonds, or the value of their home, it will increase in value over time (hopefully more than inflation).
The other challenge in helping work out what you might have to help your parents with is that this stuff is difficult to talk about. People would rather talk about anything else than get into the weeds about their finances. And often it’s a topic flat out avoided by a majority of people. In a GoBankingRates.com study, 50% of women surveyed in 2023 said they would describe their relationship with their personal finances as fearful or avoidant.
As a result, you will likely rely on your own observations and assumptions. That means you might be considering what you will have to step in and help with based solely on what you can see about their finances. If you have money-avoidant parents (and clearly many of us do), you might assume all they have is the value of their property (you can see it) or social security (since it’s a given). Unless your parents have done a full inventory of all their assets and liabilities and shared it with you, you’re never going to be able to understand the big picture.
So it’s time to start talking about it with them. Slowly but surely, over many small conversations, this money puzzle can unfold. These types of conversations are especially important if you’ve ben named executor of your parents’ estate. Here are some tips for starting the conversation.
Estate Planning:
- I’m planning for my own estate have you shared your plan with anyone?
- What estate planning documents do you have in place?
- Hey mom/dad, I was working on my own estate planning documents and it got me thinking, how do you guys have everything set up?
- Where are your important documents held?
Financial Support:
- Have you ever done any retirement planning? What was the outcome?
- I was thinking about how I will be taken care of financially in old age — what support or resources will you rely on?
- What sort of help do you think you’ll need from me as you age?
- Have you ever done a financial inventory?
- Do you have a list of where all your important financial accounts and statements are held? If not, would it be helpful to create one?
Emergency Planning:
- Do you keep emergency cash or assets anywhere besides a bank?
- What’s the plan if something happens to you?
- Have you though about who can handle your affairs if you can’t?
- Who do you want to handle things if something sudden happens with your health?
Healthcare Planning:
- Have you thought about whether you want to age-in-place?
- How would you envision making a decision to get more health care or support with your day-to-day activities?
- Have you thought about what would happen if you needed extra care or assisted living / memory care?
- Have you been happy with your Medicare coverage? Do you have supplemental insurance or any coverage for retirees from your old employer?
Tips for Reviewing Your Parents Finances:
This process won’t happen overnight. A couple tips I can share about helping you analyze your parents finances once you’ve started having these conversations is that simply having the conversations is an excellent start, but it isn’t enough. Eventually, they should start sharing the details and statements, etc. you need to fully understand the big picture. This is the only way to fully understand what you might need to help with as a caregiver or to provide financial support.
- Take an inventory via statements and policy documents of everything they own, and everything they owe. Separately, put together an inventory all income sources.
- Retirement assets like a 401k, IRA, or sometimes a whole life insurance policy with cash value can be turned into an income stream. Likewise, proceeds from the sale of a house can be invested and turned into an income stream or utilized for a “buy-in” in an assisted living facility (if required).
- Make sure you review their income sources before taxes. Most retirement payments and social security come to the bank account after tax. However, as your parent starts to need more care and a larger portion of their income goes toward medical care, their tax situation will change. Some people’s tax bill gets cut in half when they need more medical care, since these are deductible expenses. It’s important to know what the income sources look like before tax so you can accurately estimate how their taxes might change when paying for additional medical and daily living care. Less taxes = more cash flow for expenses.
- Look at the income and expense situation today and then create another scenario to review what future income sources and expenses would look like if they needed more care. How does each of the following change in monthly/annual cost: housing, food, transportation, and medical care?
- Required minimum distributions start at age 73, but it’s a minimum distribution, not a maximum. If your parent is entering later stages of care, it’s ok to start taking much more than the minimum out of their retirement savings, IRA, etc.
- On average, people spend 3-5 years in long-term care facility / assisted living before passing away. You probably don’t have to make a plan to pay for round-the-clock care for a decade or more.
- Medicare covers medical costs, but doesn’t cover help with daily living, dressing, feeding, etc. This is typically where children come in to help with caregiving. Exhaust Medicare resources first.
These tips are a good place to get you started. What else would you ask your parents about their finances?
