What happens when your parents are not financially prepared for retirement but can no longer work or are not earning enough to meet their expenses?
The obvious answer for many adult children is to help.
Eight percent of baby boomers, 13 percent of generation X-ers, and 19 percent of millennials were giving their parents money, mainly for general living expenses and medical bills, according to TD Ameritrade’s 2015 Financial Support Survey . Mothers on average received $13,000 and fathers typically received $8,500 over 12 months.1
While most respondents said that providing this support was not making them suffer financially, it still is having an effect: the survey found that financial supporters across all generations carry an average of $22,000 in non-mortgage debt and are delaying saving for their own retirement.
Depending on the situation, such delays could have meaningful consequences on retirement planning. ( Need help? Find an advisor)
For example, suppose annual financial support to a parent costs $10,000 and it continues for 15 years.
That same $10,000 per year invested as $833.33 per month for 15 years with an average annual return of 8 percent would generate $291,005. Even assuming a conservative 4 percent annual return, it would generate $206,510. The adult child not only loses the $150,000 that they give to their parent, but also the investment returns that money could have generated.
Is there any way adult children can avoid jeopardizing their own retirement when helping their parents financially? Maybe.
See what benefits your parents qualify for
Before contributing your own funds, it is worth finding out what federal and state assistance your parents might qualify for. Benefitscheckup.org by the National Council on Aging offers a customized search. Eligibility for public assistance is generally based on falling below household income thresholds, and in some cases household asset limits.
With those caveats in mind, here are some types of assistance your parents might qualify for:
- HUD public housing : Qualified applicants who are age 50 or older, have a disability, and/or have limited income will pay no more than 30 percent of their adjusted gross income for rent.
- Housing Choice Vouchers (Section 8) : Qualified applicants who are age 62 or older, have a disability, and/or have limited income pay no more than 30 percent of their adjusted gross income for rent.
- Mortgage and reverse mortgage assistance : Some states help homeowners who have limited income and are at risk of foreclosure. One example is Keep Your Home California’s Hardest Hit Fund.
- Home energy and weatherization assistance : Your parents may be eligible for a grant to improve home energy efficiency and lower their energy bills.
- USDA Housing Repair Program : Provides grants and low-rate loans to bring a home up to health and safety codes for those age 62 or older.
- Utility bill assistance : Low-income seniors may qualify for discounted electric and natural gas service. Check with the local government or utility provider for details.
- Phone bill assistance : Lifeline programs provide monthly discounts or free wireless minutes, and sometimes a free cell phone.
- Call-a-ride service : Disabled seniors may be eligible for free curb-to-curb van service for medical appointments or errands. Seniors who are not disabled may be able to use the service for a fee.
- Service varies by location.
- Tax Credit for the Elderly and Disabled : Provides a federal income tax credit to seniors age 65 and older with limited income.
- Property tax assistance : Seniors may be eligible for an installment plan or exemptions that lower their property tax bills. Assistance varies by location.
- Adult Protective Services : Helps adults of all ages who cannot provide for their basic food, clothing, shelter, and medical care needs. Services are available through state and county governments.
- Medicaid : Provides help paying Medicare premiums plus additional health benefits beyond Medicare to seniors with very limited income and assets.
- Food assistance : Your parents may be eligible for prefunded debit cards to purchase groceries (the modern equivalent of food stamps); free meals at local senior centers, schools, or churches; and home delivered meals through programs such as Meals on Wheels if they are homebound.
- Prescription drug discounts : These may be available to Medicare recipients who visit participating pharmacies. Also, Medicare Part D’s Extra Help program provides assistance paying for prescription medications. The federal Office of Disease Prevention and Health Promotion has further information on making prescriptions affordable.
- Supplemental Security Income : Seniors 65 and older who have limited income and assets may qualify for this federal government benefit.
Many seniors and their adult children are reluctant to rely on public assistance, whether for philosophical reasons or for quality of life reasons. But these programs may be an option for your family.
If your parents don’t qualify for these programs but still need help, there may be no simple way to provide for them without taking away from your own retirement unless you have far more money than you need. Most families are not in that situation, so here are some tips to minimize the harm to your finances while maximizing the help to your parents.
1. Create a formal plan
Identifying the problem and its solution has several steps.
First, if you are married or in a long-term partnership with shared finances, your partner must be on board and be included in the plan. There is no way to help one partner’s parents without affecting the other partner.
Your spouse might feel resentful about having to help the in-laws, especially if he or she thinks they have been financially irresponsible and not merely victims of bad luck. You will need to work through any disagreements together before helping your parents so they do not become a source of ongoing conflict in your relationship. You need to concur on how much money you are willing and able to provide and under what circumstances. (Related: Money, marriage, and financial therapy )
Second, you need to understand how much help you can afford to offer.
“Adult children should calculate how much they need to fund their current living expenses, future living in retirement, and other needs and obligations, such as their children’s education,” D’Amico said. “Any amounts available after that should be considered to help their parents. People in this scenario should consider foregoing discretionary expenses such as annual vacations.”
Assume that once you start helping your parents, you will be helping them indefinitely, so pick a sum that will be sustainable long term. Financial planner Leann Sullivan, vice president at TFC Financial Management in Boston, pointed out that annual ongoing support will only continue to increase as costs of living escalate. And Raskin recommended discussing with any siblings their ability to contribute in order to ease the burden on your own household.
Caretaking is another piece of the puzzle that needs to be solved.
“I’d focus on a solution that would involve the child not leaving work to help care for parent,” said financial advisor Matt Hylland with Hylland Capital Management in Virginia Beach, Virginia. Leaving work not only makes it that much more difficult to save for retirement, but also affects your future Social Security benefits.
Third, lay out ground rules with your parents. They need to have a budget, and their spending must be under control and bare bones before you step in. You need a complete picture of their finances and they need to cut back wherever possible. They absolutely must stop putting purchases on credit cards because the interest will prevent them from stabilizing their situation. (Related: Managing credit card debt )
Be clear that there are limits to what you can give and that you have carefully calculated what you can afford; there is no continually asking for more. Also let your parents know that there will be immediate consequences in the form of you withdrawing your assistance if they do not use it solely for necessities or if they use their own funds for unnecessary purchases. This is not to say that your parents never deserve to enjoy dinner and a movie again, but you should discuss and plan for the occasional, reasonable special expenditure.
One way to minimize the possibility of your contributions being squandered may be to pay your parents’ bills directly. But be careful.
There are strict asset maximums allowed in order to qualify for Medicaid and other support programs. Any funds given outright to a parent could disqualify them from these programs. Alternatively, payment for non-essential items on behalf of a parent may be welcome by a parent and wouldn’t be viewed as income, Sullivan said.
Fourth, set up a system for accountability and keep the lines of communication open. You will need to play an ongoing role in managing your parents’ finances to prevent their situation from getting worse. Hylland said getting a managed account with a financial advisor or gaining legal control of your parents’ accounts could help if a parent has spending problems.
2. Consider permanent life insurance
While it may be too late for many families to consider this option due to the high cost and difficulty of insuring an older adult, life insurance may offer a solution.
Owning permanent life insurance on the parents makes it possible for children to support their parents. Upon the parents’ death, the insurance will replenish the funds of the children that provided support, said financial advisor Leonard P. Raskin, owner and CEO of Raskin Global in Hunt Valley, Maryland.
If it is too late to get permanent life insurance for your parents — and do not assume anything without talking to a financial professional — getting it for yourself now could help your own children if they one day need to support you. (Related: Types of life insurance )
However, financial planner Tony D’Amico, CEO and senior advisor of The Fidato Group in Strongsville, Ohio, said he does not think life insurance is the best answer.
“If aging parents cannot afford to maintain their life, I think the first question is to identify why, and identify resources that could help them,” he said.
3. Tax Implications
Finally, be aware of possible tax consequences of helping your parents financially. The lifetime combined estate and gift tax exemption is more than $5 million, so depending on your circumstances, you may not ever owe any taxes on gifts to your parents. In addition, you can give non-taxable gifts of up to $14,000 per recipient in 2017. For married couples, the amount is $28,000. But if you give your parents more than that in one year, then you will need to file IRS Form 709, said Josh Zimmelman, owner of Westwood Tax & Consulting , a New York based accounting firm.
In addition, you may be able to claim your parents as dependents on your tax return if they have not earned or received more than the federal exemption amount for the tax year ($4,050 in 2017) and if you provide more than half of their financial support. Further, in order to claim them as dependents, your parents must be U.S. citizens, resident aliens, U.S. nationals, or residents of Canada or Mexico. You may also be able to deduct medical expenses you paid for your parents. Any medical expenses paid directly to the healthcare provider will not be considered taxable gifts, regardless of the amount.
The Bottom Line
Some will say that if you do not have money to spare, helping your parents is simply not an option. The reality is that most adult children would never let their parents end up homeless or without essential health care even if it means self-sacrifice.
But you do not want to start or continue a vicious cycle where no generation of your family can ever support itself because it is always supporting the older generation. You do not want your own children to one day have to help you because of the help you gave your own parents. Nor can you count on your children being able to help you — and many adults do not even have children to rely on.
Offer financial assistance to your aging parents if you must. But offer it thoughtfully, with a plan from the start, and with ongoing accountability.
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1 TD Ameritrade, “Financial Support Survey,” Aug. 4, 2015.