BY: DAVID RUSSELL, CFP®, CSA®
Vice President & Trust Officer | (601) 707-0008
Financial planning is a multi-disciplinary profession that follows a prescribed process of identifying the financial and aspirational goals of individuals and families and outlining a pathway of achieving those ambitions given the individual or family’s available resources. Goals such as a comfortable retirement, a vacation home for the family, planning the family inheritance, or closely held business succession are often voiced as primary objectives of our clients.
Risk Management is also part of the financial planning process where we examine the risks that could prevent the achievement of a client’s stated goals and discuss options for mitigating those risks. These include personal risks such as premature death, disability, or long-term care need, as well as external possibilities such as adverse tax policies, high inflation, or extended periods of under-performing investment markets.
Expenses of Parent Care
However, another economic risk that is becoming more prevalent, yet rarely discussed within a financial planning context, is the time and expense of caring for an aging loved one. The AARP and the National Alliance for Caregiving published its 2020 report, Caregiving in the U.S. which provides a comprehensive analysis of the prevalence of unpaid caregiving by family members.
The report is based on a survey of 1392 caregivers over age 18 who answered “yes” to the following question:
At any time in the last 12 months, has anyone in your household provided unpaid care to a relative or friend 18 years or older to help them take care of themselves? This may include helping with personal needs or household chores. It might be managing a person’s finances, arranging for outside services, or visiting regularly to see how they are doing. This adult need not live with you.
These studies define care as providing assistance to someone unable to perform one or more of the Activities of Daily Living (ADLs) which are eating, bathing, dressing, continence, taking oneself to the toilet, and getting in and out of bed. There are also several Incidental Activities of Daily Living (IADLs) that many people need assistance with such as transportation, grocery shopping, meal preparation, managing finances, and prescription medication monitoring that consume a large part of the caregiving commitment. In addition, advocacy services, including communicating and interacting with an aging person’s medical providers, government agencies, and professionals are provided by nearly two-thirds of caregivers. In other words, the totality of providing care to an aging loved one consumes a large percentage of an individual’s time.
In fact, according to the AARP study, caregiving is provided for an average of 4.5 years, but the economic impact that has on an individual or family’s financial plan can last for much longer as we will examine later. Caregivers with household incomes of $50,000 or more have been providing care for 4.9 years on average, longer than those with lower household incomes (3.7 years), with an average of nearly 24 hours a week dedicated to caregiving.
The economic costs to families providing long term support services (LTSS) to an aging loved one can be measured by two factors:
1| the actual out-of-pocket expenses paid by families for long term care
2| the wages, benefits, and career opportunities that may be sacrificed by the family member providing the support.
From a financial planning perspective, the true impact of these two factors can be forecast to determine the effect on retirement spending, social security benefits, and accumulated savings.
The cost of providing care, particularly for women, is significant when taking these two economic impacts into consideration. For many reasons, many of which are culturally influenced, women provide more of the caregiving functions than men. In 2008, nearly 17% of men and 28% of women were providing care to aging parents, and of all family caregivers over the age of 50, nearly double or 66% were women and 34% were men.
Real world cost effects on couples
However, lost in the statistics are real people whose financial plans can be significantly disrupted when caregiving becomes necessary. Let’s examine what happens in real life for our hypothetical couple, Jim and Cindy Lazard. Below is a summary of their personal and financial profile:
• Jim and Cindy are age 55 and 53 respectively
• Their dual incomes are roughly $140,000 per year with Jim’s salary at $90,000 and Cindy’s at $50,000
• They have two grown children currently in college for which they pay roughly $15,000 per year in college expenses
• Their monthly after-tax expenses are $7,500 including their mortgage
• Their home is valued at $400,000 with a mortgage balance of $150,000
• They have $40,000 in savings and $280,000 in retirement plan balances.
• Cindy currently contributes 15% of her salary to her 401k plan, and $4,000 annually to her Health Savings Account (HSA). Her employer matches 6% of her salary or $3,000 per year.
• Jim currently contributes 10% of his salary to his 401k. His employer matches his contribution resulting in $18,000 of annual contributions to his retirement plan.
• They want to retire at age 67 when they reach Full Retirement Age (FRA) for Social Security. They anticipate monthly spending of $6,000 once their house is paid off.
Jim’s mother Hazel, age 80, recently suffered a mild stroke making it difficult for her to get around her house or perform such daily functions as bathing, dressing, and getting to and from the toilet. Jim’s father Dan is adamantly against putting her in a facility but cannot manage the care on his own. Dan is age 88 and is beginning to show signs of dementia. Dan and Hazel are not wealthy but have too much to qualify for Medicaid. They have lived comfortably but modestly off Dan’s pension and Social Security. Jim has one brother, John, who lives over 500 miles from Dan and Hazel. Cindy, like 53% of all other caregivers (AARP), feels that she has no choice but to scale back on work to provide the care Hazel needs. Unfortunately, scaling back was not an option at Cindy’s job. Jim and Cindy decided that Cindy would take early retirement and that they would tighten their budget to live off Jim’s income, allowing Cindy to focus on Hazel’s care. Cindy can join Jim’s health insurance plan but will have to pay an additional $200 per month. To give Cindy some respite, they also decided to hire part-time sitters for 20 hours a week for which they pay $16 per hour or $320 per week. Dan is able to pay half of this through his income, so Jim and Cindy pay $160 per week or roughly $640 a month. In addition, Jim used $15,000 of their joint savings to make some modifications to his parents’ home for a wheelchair to access the bathroom. Not knowing how long she will need to provide care, Cindy does not foresee returning to fulltime employment. Without delving too deeply in the details, let’s examine the impact of this unexpected curve-ball to Jim and Cindy’s financial plan. The table below compares the before and aftereffects of Jim and Cindy’s commitment to providing caregiving services.
We can see from the table that this decision – which should be noted as an honorable one – impacts Jim and Cindy’s lifetime wealth by nearly $1.2 million dollars! Considering only Cindy’s lost retirement benefits due to early retirement, over $675,000 of retirement benefits were sacrificed. While either scenario forecasts that they can meet their retirement income goals, recall that their current living expenses were reduced under the caregiving plan, and the projected $393,000 of remaining assets is hardly a comfortable cushion.
With such an impact, what are Jim and Cindy’s options? That’s where dynamic financial planning can help them determine other alternatives that may improve their outcomes. There is simply too much emotion involved with the decisions they are faced with to go it alone. When possible, our eldercare planning includes the entire family in the process so that a plan of care that considers the needs of all parties can be reviewed. By sitting down with us and thoroughly examining all available options, we can be the objective resource to help them navigate through this life-altering event and face their future with confidence.
If you or a loved one are experiencing the financial transitions of advanced age, please contact me or any one of our professionals at 800.375.4646 to learn how we can guide you through them with honor and dignity.