Assisting Those on the Frontline of the Next Financial Crisis
Baby boomers have been hit by a barrage of devastating financial blows over the past few years. As difficult as it has been for working individuals to navigate the changing economic landscape, it has been even more challenging for those who have already reached retirement age and are living on a fixed income. The economic downturn, along with the rising cost of healthcare, cuts in benefits and the explosion of the population over the age of 65, has created a perfect storm.
Presently, one out of every four Americans polled are providing assistance to an elderly or disabled family member. In 1982 the U.S. Department of Health and Human Services reported that there were approximately 7.6 million informal caregivers providing unpaid assistance to another adult. The most recent number quoted in the Wall Street Journal shows that this figure has exploded to 62 million Americans helping to care for another. That is an 800% increase in less than 30 years. And the projection for the next 30 years is even more staggering.
Seeing that the majority of American households are sustained by two wage earners, being a caregiver can change a family’s financial landscape. Even if the family member being cared for has an adequate income stream, the person who provides additional assistance may be forced to reduce their work hours or give up employment entirely. The change in work status not only alters projected social security benefit for the caregiver, but also 401k and any other contributions made to savings and investments. Unfortunately, most people don’t factor the possibility of caring for loved ones into their financial planning. Regardless of the present status of family members, there are positive steps to take in order to help mitigate the cost of assisting with care now and in the future.
When Your Parents are in Good Physical and Financial Health
This is the best of all scenarios. If you fall in this category, now is the time to verify that all essential documents are in place, such as a will, estate plan, and durable power of attorney. Encourage them to make a detailed list of any bank accounts and investments they hold and to keep all information and statements in one location. Finally, if Long Care Insurance is not part of their financial portfolio, now is the time to determine if the addition of this could help eliminate the need for additional family support later.
When Your Parents are Living Close to the Edge
For many retirees, their social security benefits, pensions, and other retirement savings aren’t going as far anymore. If your parents are healthy, still live in their own home, and want to remain independent, they may want to consider downsizing. In certain cases a reverse mortgage or placing a portion of their savings into an immediate annuity could be an appropriate way to subsidize an inadequate or non existent pension. However, these solutions are not for cases that need a short term fix. Information from those who sell these products should be verified by an accredited financial planner, tax consultant and representative with the Council on Aging.
When Your Parents are no Longer Independent
This is where things start to get complicated. A recent report estimates that 40% of caregivers are spending more than $5,000 a year on a loved one that needs help with their care. In these cases, caregivers need to seek ways to lower the out of pocket costs they incur. First, look into claiming your parent as a dependent. This deduction may still be taken even if they do not live with you. In order to qualify, you must provide at least 50% of your parent’s financial support and they must meet the income requirements. If a parent is living in your home, you may also be able to also include a percentage of your mortgage and utilities. IRS Publication 501 can help determine whether you can claim a qualifying relative exemption. Other possible deductions include claiming your dependent/qualifying relative’s medical expenses (IRS Form 2120) or child and dependent care credit (IRS Publication 503). In addition, a number of states offer credits or deductions for state income taxes, as well. You will need to consult a tax specialist to determine whether your situation meets both income and support tests for available federal tax deductions, or if you live in a state that offers tax credits and deductions on state income tax forms.
When Your Parents are Indigent
If your parent is in bad financial straits, check to see what additional state financial assistance is available for caregivers. Also, if they are on Medicaid, many state offer Cash and Counseling programs that helps offset costs of food, medical care, transportation and bills to caregivers. To see if your state is a participant, your local website for the National Council on Aging is a good place to start.
A Family Plan
Caring for a loved one in their elder years can be one of the most rewarding things you do. However, you need to be careful not to derail your own financial health. If you have siblings, work together to determine everyone’s physical, emotional, and financial ability to contribute to care. If there is one primary family member caring for a parent, you may find that other family members would support the idea of a lawyer drawing up an Elder Care Agreement. This agreement allows the person you care for to pay you a salary to offset the change of your work status or out of pocket expenses. Consult an accountant and tax advisor to ensure all taxes on this money are handled properly.
Caring for others can make us consider what we want for ourselves as we age. Now may be a good time to consider adding Long Term Care insurance to your own financial plan. Assisting a loved one in their later years may be one of life’s greatest gifts, but it also involves sacrifice. Having the ability to take care of your self may be even a greater gift. It is a gift for you, and a gift for the next generation.
Need support creating a family plan for yourself or your parents? Contact us and learn more about how Diccianni Financial Group can assist you.