Question: Our parents, now nearly 75, raised and put three of us through college and, as a result, were able to save very little for their retirement years. While they did not involve us in their finances in the past, when Dad’s health began to fail, Mom called me in and told me about her concerns for the future. Dad had worked in a plant and received no pension; Mom had never worked outside the home.
In addition to a modest home ($50,000), their assets total about $100,000. Their only monthly income is from Social Security (about $13,000 annually) and the return on their investments – mostly CD’s -- has averaged about four percent per year. For the past couple of years, they have been going into their assets to live because of Dad’s drug and medical bills. Although they have no debt, my siblings and I understand that it’s a little late for them to plan – not that they had that much to plan with in the first place after educating us. But it is obvious to me that they will soon run out of money. And if one of them has to go into a nursing home, we know that Medicaid is the only answer. Despite their dreary financial picture, Mom insists that they want to leave us some of their assets when they die. They have a lot of pride and have not asked for help, but my siblings and I want to help them as, without our parents, we would not be what we are today.
Answer: Given the well-deserved pride generally attributable to those belonging to your parents’ generation, the fact that your mother even called you must be looked upon as a cry for help.
Like many elderly Americans, your parents spent a large portion of what would have been their retirement raising and educating you and your siblings. Helping your parents plan for their financial future at this point in their lives is much different than you planning for yours because: (1) They don’t have much time left to prepare; (2) Their income will not increase to any appreciable extent; (3) They can’t afford to take market risks with their investments; (4) With age comes the harsh reality that acute illness and long-term care can quickly decimate assets; and (5) Age, health, and money concerns may make them less capable of managing their money.
The first order of business is to help your parents create a realistic budget that should be projected out for at least three or four years. By taking their expenditures during the past 12 months and increasing these amounts by seven percent per year for inflation and increased needs, you will get a rough estimate of what they will need in the future. Make sure to add in a sufficient amount to cover the potential cost of help and care at home.
Then tally up their income from all sources -- Social Security, retirement, IRA distributions, interest, and dividends – and increase these amounts by four percent per year.
And lastly, put together a balance sheet – assets less liabilities – to get a handle on your parents’ real worth. Don’t include their furniture or other personal property that is not marketable.
Once you have these figures, subtract your parents’ expenses from their income to determine the shortfall which will be made up by spending assets. Make sure to remember that as assets are spent, the income that was generated by those assets will also be reduced, thus putting your parents further in the hole each month. Simple arithmetic will tell you how long it will be before your folks are out of money. And should one of them need long-term care or higher level assisted living, the lights may go out earlier than anyone could anticipate.
Taking the NextStep: How can you help? Find out about assistance programs that may be available to your parents to help reduce the shortfall such as Meals on Wheels, food stamps, SSI, and the like; however, remember that since these and other local programs are “needs-based”, your parents may not qualify because they have too much money. Check into what Medicaid benefits will be available in your state if and when your father needs nursing home care.
In the meanwhile, you and your siblings may want to help stem the shortfall by using a gifting program to your parents each month. Without gift tax considerations, each of you – and your spouses -- could give each of your parents as much as $10,000 per year. While it is unlikely that your folks will need $60,000 per year, we suggest that you and your siblings could consider picking up the shortfall each month in order to preserve their assets. A gift of $250 per month from each of you would probably more than cover what is needed, and what better way to spend your money?