The Baby Boomers are doing some serious retirement planning these days.
Just one problem. They forgot to plan for their parents.
They may be 55, but their parents now need their children more than ever before.
I have many clients that have at least one parent with Alzheimer’s disease — often in their 80s or 90s. The Boomers face many social, physical and mental challenges with their parents. These can be very difficult on their own.
In addition, there are several financial challenges that arise that must be faced and in every case, intergenerational or cross-family financial discussions are the key to a positive outcome. Here are four challenges to deal with and possible solutions:
1. We saved for our retirement, but didn’t plan on paying for everyone else’s as well.
Every retirement planning discussion should include the following question: “Are your parents and in-laws likely to be a financial burden, fairly independent, or are you expecting a meaningful inheritance?”
While many people have a hunch about it, they really need to have a better handle on it, as it is key to their own retirement plans. In my firm, we recommend that, if possible, they have a conversation with their parents that starts with: “We are doing some personal retirement planning, and we were asked a question about our parents. We don’t need to get into huge detail, but we wanted to have a discussion about whether we might need to provide some financial support to you or whether we thought there would be a meaningful inheritance. (Wait for laughter to stop.)”
It is possible that this question will have a pretty short response and won’t go further, but in most cases it does open the door to a more complete discussion.
2. Why are we responsible for Mom and Dad? What about your brothers?
Sometimes life isn’t fair. There is always someone who shoulders more of the load. It doesn’t stop just because Mom is getting old and needs support.
Support for older parents is both in terms of time and energy, and also can be in terms of money.
In many cases, women in particular have to retire early and give up an income to look after parents. This in itself could affect their retirement plan. Should they be entitled to get paid by the parents? Should they get a larger inheritance?
In an ideal world, the child that provides most of the caregiving is not in need of any compensation, and the parents can pay for any needs that arise.
In the real world, sometimes there does need to be some financial compensation for all of the time that one child puts in. With siblings, you will likely never get full agreement on these arrangements. It is usually something that should be co-ordinated between the caregiver child and the parent, and other siblings should be notified of the facts. It isn’t a vote.
3. We should have had the insurance discussion sooner.
If you are 45 years old, do you know what insurance coverage your parents have? Do they have critical-illness insurance, long-term care insurance, individual life insurance, joint first-to-die, joint last-to-die life insurance? Did their insurance coverage expire at 65 or 75?
The reality is that this is your business. All of these insurance policies, other than joint last to die, will have an impact on your parents’ financial well-being. They may mean the difference between them being able to look after themselves financially or require your financial support.
This conversation is also a good eye-opener for the 45-year-old — and it may raise some opportunities.
Opportunity No. 1: It may be too late for your parents to be properly set up due to health issues, but now is the time that you should be ensuring that living benefits like critical-illness insurance, in particular, is explored.
Opportunity No. 2: If one of your parents is in reasonably good health — even if they are 75 years old — taking out a life insurance policy on a parent may be an important part of your retirement plan. I know this may not seem right at first glance, but if the 45-year-old is going to have to look after the parents financially, it can impair his personal retirement plan. If his insured parent dies in 20 years, the son will receive a tax-free insurance payout at age 65 — a perfect time from a retirement perspective. In many cases, the return on investment of this type of insurance policy can be 7%+ on an after-tax basis.
4. Do Mom and Dad have powers of attorney in place? What about their will?
Once again, what might not be considered your business can quickly become your most important business. They should have a power of attorney over personal care. This provides guidance on who can make medical decisions on the patient’s behalf, if he is unable to make his own decisions. It usually deals with items like whether you want doctors to make ‘heroic efforts’ to save your life, or not.
There should also be a power of attorney over property. This gives someone the ability to sign documents on another person’s behalf. Without it, many necessary financial transactions and decisions will happen at a snail’s pace.
As for their will, do you know where to find it? Has it been looked at in the past 20 years? Are the executors of the will up to date? Have the named executors died 10 years ago? These issues could become a nightmare for the survivors if they aren’t reviewed and clarified.
I believe the most important issue here is opening up the lines of communication with older parents. It is important to position the conversation in terms of your own personal planning, and addressing questions that you need to answer to complete your plan.
As the Baby Boomer children, you need to have these conversations with your parents. It will benefit everyone in the long run — and there is no day better than today.
Click here to download our 2012 Retirement Income Guide