He found himself in a financial bind. When Khalid Sumner became the father of twin girls in 2003, he could envision future college tuition bills for his daughters. But a year later, when his grandfather became ill, Sumner was hit with expenses he hadn’t anticipated and learned a harsh reality about family finances in the process: Starting a college fund for your children and saving for retirement aren’t the only major monetary stresses you’re likely to face in life. As parents and other relatives age, you may be called upon to help ensure their financial well-being, as well.
“My grandfather’s health slowly degenerated, and the brunt of his care fell on me,” says Sumner, 26, who was part of the recent subprime-related layoffs at Citigroup in New York City. “We had to pay for someone to come take care of him. We had to pay whenever he went to the doctor for visits. It got to the point where I didn’t know what was going to happen because after two or three months, there wasn’t going to be any money left.”
Sumner hadn’t planned for these expenses because he and his family had never had a conversation with his grandfather about what assets he had in place. It’s a mistake that financial planners maintain can be devastating to the wealth of entire families as parents and grandparents reach their senior years. “People may end up having to foot the bill for some of their parents’ expenses, particularly in their later retirement years,” says Lanta Evans-Motte, a financial adviser in Calverton, Maryland. “So they need to know whether they may have to actually come out of pocket to take care of their parents’ expenses.”
The costs of eldercare are far reaching. A 2006 study conducted by The PNC Financial Services Group found that 40% of those surveyed considered providing financial support to elder family members to be an important financial goal, and 20% were concerned about the cost of caring for parents. Some 20% of respondents reported that they spent an average of $6,700 a year on parents or in-laws.
Money spent caring for mom and dad is money not spent saving for your own retirement. “That would also impact what you’re trying to do now to save for college for your children,” says Lee V. Bethel, president of Comprehensive Benefit Services Inc. in Alexandria, Virginia, and board member of the National African American Insurance Association. “The pie can only be split in so many ways.”
But financial planning can make all the difference. If people with aging parents sit down early enough to discuss their parents’ future financial plans, there’s time to make any necessary adjustments. “You don’t want to ask a parent if they have life insurance when they’re 80 years old,” Bethel says. “You want to ask when they’re 60, when you can still get some at a reasonable price.”
BARRIERS TO COMMUNICATION
Recognizing the importance of such discussions is easy. Getting aging parents to disclose their financial situations may be far more difficult. One reason parents may not want to talk to an adult child about their finances is such a conversation shifts the dynamics of the relationship.
“It takes away your parents’ authority, their standing, the respect they may feel they’ve earned because now you’re acting as a peer to them or even a parent,” says Pamela Brown, Ph.D., a clinical psychologist based in Philadelphia. Another reason such a conversation may be difficult is it deals with plans put in place to handle illness and death. “Bringing up any issue that reminds someone of their mortality is usually a difficult one, even if you have a great relationship,” Brown adds.
A strained relationship between a parent and child only compounds the problem because parents may suspect that the child is just looking for money or worried about an inheritance. “They may feel like the child’s meddling in their financial affairs or trying to take advantage and exploit them,” Evans-Motte says.
A SMOOTHER CONVERSATION
There’s also the issue of time. Important conversations about money should take place face to face, and it may be impossible to talk about everything that needs to be discussed in one fell swoop. To maximize your chances of having a productive discussion, find a time and place where there are as few distractions as possible, suggests Brown. To spark the conversation, it may also help to take your family member to a seminar or workshop on financial planning.
Enlisting a third party such as a financial adviser or estate planning attorney to facilitate the conversation may also make the person
feel more at ease. Finally, acknowledge that the other person may not feel comfortable talking about his or her finances with you. If that’s the case, consider enlisting another family member. “Have some alternative resources available for them,” Brown says.Having this conversation won’t be easy, and you may be tempted to put it off for later. But doing so means you’re less likely to be financially prepared if a parent or elderly relative runs into a financial bind or experiences a health crisis. “The earlier you start, the more choices you have,” Evans-Motte says.
The Heart of the Matter
So what should a conversation with your parents entail? You want to find out as much as possible, but there are four key areas that must be addressed, experts say.
1. Day-to-day expenses “You really need to have a good idea of what the cash flow is,” says Lanta Evans-Motte, a financial adviser in Calverton, Maryland. “Does the parent have enough money to cover current expenses and is that anticipated to continue?” It’s important to factor in inflation and unexpected expenses that might arise, such as costly home or auto repairs.
2. Retirement income The simple truth is that traditional pensions based on an employee’s salary and years of service at a particular company are quickly disappearing. As a result, it’s important to ask parents who are still working about how much they’re contributing to retirement accounts such as a 401(k) or IRA.
3. Insurance Health insurance is critical and it’s tough to gauge how much it will cost in coming years. It’s important to make sure that eligible seniors are enrolled in Medicare prescription drug plans and have Medigap insurance to help cover the co-payments and deductibles, says Evans-Motte. What’s more, with the average annual cost of a private room in a nursing home nearing $78,000 per year, long-term care insurance should be a part of the conversation. If parents can’t afford long-term care insurance, consider buying a policy for them. “I have some clients where the children are paying for their parent’s long-term care policy,” says Lee V. Bethel, president of Comprehensive Benefit Services Inc. in Alexandria, Virginia. “Paying $150 or $200 a month for the policy is certainly better than having to come up with $3,000 or $4,000 a month [for a nursing home].”
Also consider burial costs. Does the person have adequate life insurance? After his grandfather died, Sumner learned that his mother, Yvonne Heron, did not have life insurance. “I took out a life insurance policy for my mom that I’ve paid so I wouldn’t go through what I went through with my grandfather,” he says.
4. Wills and medical directives Not only do you need to know if parents have a will, but you should know where it is, says Patrick Simon, a probate attorney in Dallas. Also determine who will make medical decisions if your parent is unable to do so. If someone becomes incapacitated, it’s important that there’s a medical power of attorney in place for that person, Simon says.