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| The Basics | 5 financial steps to help your aging parents
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It's the perfect Mother's Day or Father's Day gift: help ensure their financial security. They'll feel better -- and you'll know the full burden of care won't fall on you.
By Terry Savage
Sooner or later, the moment comes when you realize that your parents need your help. It will come as a shock -- sudden recognition that these two people who guided you to maturity now need your advice or help to deal with issues ranging from health care to finances. Ultimately, your parents may need your financial support.
There are steps you can take now to make this transition easier. But it all depends on communication. You dont want to hear from your mother that Dad lost his retirement funds to an investment scam. And you dont want to hear from a neighbor that your widowed mother has been victimized by a furnace repair service. So a program of regular discussions about your financial issues and theirs will provide a platform for future problem solving.
Its never too early -- or too late -- to start this two-way discussion. Even notoriously private parents will be willing to offer advice to you. Then its up to you to turn the discussion to their situation. Here are some steps you can take now to make sure your parents finances are well-planned. After all, you dont want to be caring for them just as your children are starting college.
Discuss retirement plan investments
Start a conversation about their company retirement benefits. If theyre still working, you might help them diversify the investments in their company plan. Use the retirement planning tool on MSN Money to show them how to reach their retirement goals. If theyre about to retire, you might introduce them to programs such as T. Rowe Prices Retirement Income Manager, where a one-time $500 fee will give them advice on how to invest their retirement assets to make sure they dont run out of money.
You may be able to help your parents with some investment advice. But dont forget that they may have a lot less risk tolerance than you do. For a portion of their capital, you might consider an immediate joint annuity -- a guaranteed check a month for life no matter how long the survivor lives. Its a concept thats considered old-fashioned by many. And certainly it has drawbacks -- notably the problem of locking in a fixed payout that may not cover costs that rise because of future inflation. But it will buy peace of mind that no matter which spouse dies first, there will always be money for the survivor.
Moms need IRAs, too
If your parents are older, they may represent a more traditional family where Dad worked and accumulated retirement benefits, while Mom stayed home and raised the children. But even non-working spouses are entitled to open Individual Retirement Accounts. If your parents have joint income under $150,000 a year, your mother can have her own Roth IRA. Help her set up an account at a mutual fund company. (Dad doesnt have to know.) To get more information on mutual fund companies, click here. (For brokerage firms, click here.)
And if your parents have earned income but are not covered by a company pension plan, insist they each open a deductible IRA. This year, people over 50 may contribute $3,500 -- a number that grows to $5,000 in 2008.
Women live longer than men. But many men dont take this probability into account when planning their retirement spending. Make sure your Mom doesnt sign off on a retirement plan payout that ends if your Dad dies first. (A spouse is required to OK such a deal.) And make sure that both parents are participating in their retirement budgeting process. MSN Money's retirement expense calculator can help in this important task. To estimate your probable retirement income, use MSN Money's income estimator.
Gift long-term care insurance
The one thing that could devastate your parents in retirement is the need for one or both of them to have long-term care or assistance. Neither Medicare nor Medicare supplement policies cover this type of custodial care. Only after most assets and income are used up will state Medicaid programs step in to provide nursing home care -- typically in an under-funded institution that would never be your first choice for an aging parent.
Long- term care insurance can be a much better alternative. It offers a pool of benefits, and allows your parents to receive care in their own home if deemed necessary by their physician. Even if your parents are in their seventies, its not too late to purchase a policy. At that age, if theyre still in reasonably good health, the annual premiums should be less than a one-month stay in a nursing facility. (Those costs can range upward from $5,000 per month today.) Read more on long-term care insurance.
You can buy the policy yourself -- a perfect Mothers Day or Fathers Day present. Or, once youve started the policy, you can gift them the cash to pay the premiums themselves or keep on paying it. Depending on their ages, a portion of the annual premium costs may even be tax deductible.
Consider a reverse mortgage
The moment may come when your mother confides that she is running out of money. Even if you thought your parents were well established, you probably never considered the cost of medical care, pharmacy bills, rising real estate taxes or home repairs. But one day, these costs start to overwhelm their budget. No parent wants to be a burden on the children. And a reverse mortgage may offer a good solution.
If your parents are over age 65, and own their home free and clear of a mortgage (or with only a small balance remaining), a reverse mortgage will create a lifetime stream of income out of the equity theyve built up in their home. As long as they stay in the home -- no matter how long they live -- a fixed monthly check will arrive.
Many seniors who have worked a lifetime to pay off a mortgage hesitate to go back into debt. Youll have to explain that this is different, and you may have to do a little homework to understand the mechanics as well as whether it makes sense in the community where you live.
As I explained to my own mother, its sort of a pension out of your home equity. A reverse mortgage allows seniors to keep title to their home, while withdrawing their equity. And they can never run out of equity or be forced out of their home.
When they die -- or move -- the house is sold, and they or their heirs receive any amount in excess of what has already been advanced through the reverse mortgage. But even if they live to 110, far exceeding actuarial estimates, the check will still arrive as long as they live in the family home!
The amount of monthly check is based on the value of the home, their age, and the current level of interest rates. The National Reverse Mortgage Lenders Association has a list of lenders that make these loans. To access the list, click on the link to the association's Web site at left. These loans are Federally insured to protect the lenders in case the homeowner lives longer than expected. But depending on the location around the country, there are fixed limits on the value from which loans can be calculated -- about $266,000 maximum equity value. All costs are calculated into the amount of the monthly check.
The withdrawals can be taken in one lump sum, or monthly check, or a set amount for a fixed period of years. And the money can be spent on anything -- from paying back taxes to renting a condo in a warm weather location. Any seniors who take out a reverse mortgage are required to undergo independent counseling from a certified organization such as AARP.
Discuss their estate plan
This is the last subject that your parents want to talk about with you. But its also the most important Convince them that you dont want to know how much they have -- or might leave to you. Only that you want to make sure they have a current and complete plan.
This is a gift I gave my own parents -- an estate plan. I never got involved in the details of what was being left to each of the children. But I did insist that the lawyer they hired create a revocable living trust and also a health-care power of attorney for each. And my parents agreed that each wanted a living will, a document directing that no extraordinary measures be taken to prolong life.
The advantage of the revocable living trust is the ability for a successor trustee to step in and act if either or both of them are incapacitated by illness, such as a stroke. (I saw the complications when my grandfather was paralyzed by a stroke, and my family had to go to court to petition for control of his assets.) And Ive insisted that a copy of the health-care power of attorney be included in their medical records, so there will be no questions in case of a medical emergency.
Dont delay!
If you consider all of these issues to be the most unpleasant task, you have no idea what a mess can occur if you leave these tasks undone. Mothers Day or Fathers Day is a perfect time to sit down with your parents to work through these issues. (In fact, you might want to print out this column and use it as a starting point.) You may be surprised that your parents feel a great sense of relief. Either they didnt want to burden you with their problems, or they didnt know how to open the discussion.
So use the occasion to get started. You might not cover all these topics at one sitting. But once youve opened the door, future discussions can cover all these issues. Consider it a gift to your parents -- and yourself. Its the gift of peace of mind. And its priceless.
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