Managing Cash Flow in Retirement

The steps involved in planning for your parents’ later years are not much different than planning for your own. However, there are some important differences - they have fewer years to prepare, their income is most likely decreasing, and they need safer investments.

The first step is to get a “big picture” a reality check – what to they own versus what they owe. Add all assets, including the value of their home and investments, and subtract any debts. The final figure is their net worth and will be an important factor in determining their financial options moving forward.

Next, you’ll want to explore their monthly expenses. Whether your parent will be living at home, in your home, or in a long-term care facility, determine how much they need to pay their bills. It may be helpful to prepare for different scenarios, such as moving to a nursing home versus staying at home.

Finally, total all monthly income, including Social Security, pensions and any wages. Add in the expected interest and dividend income from any investments, based on what these assets have earned in the past.

If your parents have income that exceeds their expenses, that’s great news. But if they currently live independently (not in a nursing home), you’ll want to explore how to pay for long-term care should it become needed.

If your parents’ expenses are greater than their income, the problem can be serious. Since their income is not likely to increase significantly, any shortfalls require the spending of savings. And as assets are depleted, there will be less and less income will be realized through interest or dividends, causing an even greater shortfall.

When searching for additional income to meet expenses, there are strategies for making the most of your parents’ assets – from the value of their home to tapping the value of other assets to making the most of gifts from family.

The Home as an Asset

For most people, the bulk of their net worth is tied up in their home. A home may be worth $400,000, but the equity in your parent’s home is available only if your parents sell the home or borrow against it. But without including the net worth of their home, it may not be possible to produce the income needed to preserve their lifestyle.

If your parents need to tap their home’s value to make end meet, options include selling their home and moving to a cheaper home, tapping home equity through refinancing, and reverse mortgages. Each of these topics has potential risks and benefits and we encourage anyone considering these options to consult with a financial advisor, accountant, or attorney who specialized in elder care issues.

Additional Strategies for Income

Depending on the assets of your parents and the financial situation of you and your siblings, there are additional income options to consider.

If your parents have “whole life” insurance policies, it is possible to borrow against the value of the policy in the form of a loan. There can be tax benefits to these loans as well and repayment is not required. However, taking loans from the value of these insurance policies will reduce their value when the policy is payable. Typically, these loans are best for emergencies and are eventually repaid.

Next, a loan from a family member, particularly from a child of aging parents, is a common way older folks meet expenses. These loans have many benefits. For example, the loan is often an advance on an inheritance and the funds will be offered at low or no interest rates. If you are considering loaning money to your parents, work with an attorney draw up the paperwork and make sure your siblings or other close relatives know you’ve made the loan.

Gifts are another potential source of income for aging parents. Tax rules stipulate that any individual can make a $14,000 gift to any other person without any taxable gain. That means that you, and potentially your spouse and children can each give each of your parents $14,000 per year without them having to claim that amount as income on a tax return. A gift is a gift, and that means you don’t expect any financial payback.

When family gifts and loans increase to the point where you are supplying more than half the support of your parent, you can legally claim them as dependents. That means claiming them on your tax return as additional household members. Depending on your financial situation, a potential benefit is that all their medical expenses can be included in your itemized tax deductions. Claiming your parent also means that your parent may be covered by your insurance plan.

Finally, viatical settlements are an option that can help terminally ill individuals cover expenses in the final months or years of life. Patients can sell their life insurance policy to a viatical settlement company and receive a lump sum benefit on which to live. If your parent’s life expectancy is six months or less, a viatical settlement company will pay up to 80% of the face value of the policy; up to 60% if your parent’s life expectancy is two years or less.

For Parents Without Assets and Special Situations

If your parents have few assets and a modest income, the federal programs can provide assistance if your parents qualify. If your parents have assets but one parent requires expensive nursing home care, Medicaid may also be able to help while enabling the healthy spouse to retain their home, car, and some savings under “spousal impoverishment” rules. Medicaid benefits vary from state-to-state, so be sure to seek the advice of a qualified attorney or advocate when researching federal benefits.