Question: My aunt and uncle, who are in their late 70’s, never had any children and were instrumental in raising my brother and me and putting us through college after our parents died at young ages. As a result of their generosity, they miscalculated or never even thought about their retirement years. My brother and I learned about this only when my aunt’s health began to fail, and our uncle called to tell us his concerns about their future.

To our dismay, in addition to a home that is in need of a lot of repair and can’t be worth more than $55,000, they have $65,000 in the bank, and their total monthly income comes from Social Security and a small pension (about $13,000 annually). Their return on investments - mostly CD's -- has averaged about three to four percent per year, and they have been going into their assets for the last couple of years because of my aunt’s prescription bills. They have no debt. We realize that it's a little late for them to plan, but it is obvious to my brother and me that they will soon run out of money. They have a lot of pride and have not asked for help, but we would like to know how we can help the people who helped us.

Answer: Even though they did not have the obligation, your aunt and uncle stepped up to the plate and probably spent a large portion of what would have been their retirement helping to raise and educate you and your brother. Helping them plan at this point in their lives, we agree, is something you and your brother should do, but it is much different than planning for your retirement 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 uncle 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 to ten percent per year for inflation and increased needs, you should be able to 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 – in this case, Social Security, pension, and interest - and increase these amounts by three percent per year.

Lastly, put together a balance sheet - assets less liabilities - to get a handle on their real worth. Don't include their furniture or other personal property that is not marketable.
Once you have these figures, subtract their expenses from their income to determine the shortfall that will be made up by spending assets. And remember that when assets are spent, the income generated by those assets will likewise be reduced, thus putting your aunt and uncle further in the hole each month. Simple arithmetic will tell you how long it will be before they will run 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.

If they are going to remain at home for as long as possible, consider the use of a reverse mortgage to extend their ability to do so.

Taking the NextStep: Find out about assistance programs that may be available to help reduce the shortfall, such as Meals on Wheels, food stamps, and the like; however, remember that since these and other local programs are "needs-based", your aunt and uncle may not qualify because they have too much money, believe it or not.

Then, as necessary, you and your brother can help them stem the shortfall by supplementation on a monthly basis, either through a gifting program, a program that could allow you and your brother to claim your aunt and uncle as dependents, or through a loan that would be secured with a mortgage on their residence.

Without gift tax considerations, each of you and your wives could give your aunt and uncle $12,000 per year. While it is unlikely that they will need this much additional money, we suggest that you and brother consider picking up the shortfall each month in order to preserve their assets, thus allowing them to retain their interest. 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?