He plants trees to benefit another generation. Caecilius Statius, Roman Poet
Question: My husband and I are looking forward to retirement. Because our parents and children may need help financially, we’re not sure how to balance everyone’s potential needs. Help!
Answer: You are not alone. Many pre-retirees and retirees are concerned about the financial, physical and emotional needs of family members. Statistics show that almost half of baby-boomers provide financial assistance to aging parents — paying for groceries, medical and utility bills — while also helping their adult children. Depending on the children’s ages, this could mean tuition, food, cellphone bills, insurance, college debt and any number of other expenses.
Feeling conflicted and somewhat drained, our retirement needs often end up at the bottom of the list. Welcome to the sandwich generation. One reason for this new reality is that while our life expectancies are increasing, many people haven’t saved enough for these extended lifespans while years of low interest rates continue to hurt retirees. Meanwhile, the housing crisis and the “Great Recession” affected the investment portfolios of many and took a toll on labor markets. The “Millenials” and “Gen-Xers” may find it difficult to find jobs that will cover their expenses and cover any outstanding school loans.
Whether it is economic circumstances or personal choices, the economic dilemma is very real. The question remains: how to allocate limited resources for multiple and increasing needs of a family. The answer is “it depends.” With a little planning, we can face this new reality.
Remember, there are no loans for your retirement. Although the immediate inclination may be to help family members, it is important to strike a balance between caring for ourselves and helping others. It’s not selfish to take care of yourself. There’s a reason that in case of emergency, flight attendants remind us to place the oxygen mask on our face before helping others, including our children.
If you do decide to gift or loan funds to children, it may allow them to contribute to the family in the future. Set clear expectations whether financial assistance is a loan or a gift. Remind them that you’re providing the loan to help them out of a temporary situation. If the loan is of a sizable amount, handle it in a business-like manner. Document the transaction and terms. You may want to read up on the “applicable federal rate,” which states that if you lend money to family members you must charge a minimum rate of interest set each month by the Treasury, or risk having to pay a gift tax and other income tax consequences. In addition, check with your tax advisor to see if you’re entitled to any tax benefits resulting from the support you give to family members.
Draining your savings could place your entire family in a precarious situation down the road. Many people put their own retirement at risk by saving too little and spending part of their resources on adult children or their parents. Here are a few tips:
• Establish and stick to a family budget.
• Maximize contributions to your retirement plans. Don’t raid these accounts for your children’s or parent’s needs; this needs to be for your retirement.
• Keep debt under control. Try to keep consumer debt under 20 percent of your take-home pay.
• Before abandoning your career to take care of aging family members ask your employer about telecommuting, flex hours, reduced hours or taking unpaid leave. Leaving your job could reduce your earnings and Social Security benefits.
• Talk to your children about exploring financial aid and the possibility of working part-time during school.
• Ask your parents if they have money set aside for their care or long-term care insurance to help mitigate some of the costs.
• Anticipate your family’s financial needs. Identify how much income you’ll need in the best and worst case scenarios.
With children and parents, it may help to ease into any changes. Discuss decisions and the positive and negative consequences of allocating family financial resources. Living situations may need to change. Combining resources and living under one roof may be a solution.
Running a multigenerational balance sheet presents unique challenges requiring special skill sets. In effort to promote and maintain harmony, it’s never too soon to have the conversation and talk realistically about finances. This is an opportunity to reinforce the importance of saving, budgeting and spending wisely.
Be a role model for fiscal responsibility. Focusing on common goals and treating everyone with respect helps reduce judgment and emotions. It is possible to balance the needs of children and older relatives without depleting yourself emotionally, physically or financially. Stay focused and invest accordingly.
You should discuss tax and legal matters with the appropriate professional. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or solicitation to buy or sell any particular investment. There is no guarantee any particular investment strategy will be successful. Opinions expressed herein are those of the author and subject to change at any time. Investing in stocks involves risk, including the possibility of losing one’s entire investment.
This article provided by Darcie Guerin, CFP®, Associate Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at 239-389-1041,firstname.lastname@example.org or www.raymondjames.com/Darcie. Please contact Darcie with any questions you would like to have answered in this column.