Objective information about financial planning, investments, and retirement plans

Pension Payments – Annuity or Lump-Sum?

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I’m often asked by folks approaching retirement whether to take their pension as a lump-sum payment or as an annuity (a stream of monthly payments).  Investment News recently published this excellent piece on this topic which is worth reading.

As with much in the realm of financial planning the answer is that “it depends.”  Everybody’s situation is different.  Here are some factors to consider in deciding whether to take your pension payments as an annuity or as a lump-sum.

Factors to consider 

Among the factors to consider in determining whether to take your pension payments as an annuity or as a lump-sum are: 

  • What other retirement assets do you have?  These might include:
    • IRA accounts
    • 401(k) or 403(b) accounts
    • Taxable investments such as stocks, bonds, mutual funds, or others
    • Cash and CDs
  • Will you be eligible for Social Security?
  • Will the monthly pension payments be fixed or will they include cost of living increases?
  • Are you comfortable managing a lump-sum yourself and/or do you have a trusted financial advisor to help you?
  • What are your expectations for future inflation? 
  • What is your current tax situation and what are your expectations for the future?

Factors that favor taking payments as an annuity 

An annuity might be the right option for you if:

  • You have sufficient other retirement resources and are seeking to diversify your sources of income during retirement.
  • You are uncomfortable with managing a large lump sum distribution.
  • You are not eligible for Social Security.
  • Your pension payments have potential cost of living increases built-in (typical for public sector plans but not for private pensions).

Factors that favor taking payments as a lump-sum 

A lump-sum distribution might be the right option for you if:

  • You are comfortable managing your own investments and/or work with a financial advisor with whom you are comfortable.
  • You have doubts about the future solvency of the organization offering the pension.  This pertains to both a public entity (can you say Detroit?) and to a for-profit company.  In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC.  If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.
  • You are eligible for Social Security payments. 

The factors listed above favoring either the annuity or lump-sum options are not meant to be complete lists, but rather are intended to stimulate your thinking if you are fortunate enough to have a pension plan and the plan offers both payment options.  A full listing for each option would be much longer and might vary based upon your unique situation.

Moreover the decision as to how to take your pension payments should be made in the overall context of your retirement and financial planning efforts.  How does each payment method fit?

Lastly those evaluating these options should be aware of predatory financial advisors seeking to convince retirees from major corporations and other large organizations to roll their retirement plan distributions over to IRA accounts with their firm.  While this issue has seen a lot of recent press in terms of 401(k) plans it is also an issue for those eligible for a lump-sum pension distribution. If you are working with a trusted financial advisor an IRA rollover can be a viable option, but in some cases rollovers have been directed to questionable investment options putting many retirement investors at risk.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

3 Misunderstood Aspects of Social Security Benefits

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This post was written by Jim Blankenship, CFP®, EA, a fee-only financial advisor and owner of the excellent finance blog Getting Your Financial Ducks in a Row, where he covers IRAs, Social Security, Taxation, and most other aspects of financial planning.  I’ve known Jim for a long time and consider him an expert on Social Security and many other topics.  His blog is must-reading for me and should be for you as well.

The Social Security benefit landscape is a complicated and confusing place to navigate. It’s tough enough to figure out what is the best time to file for your own benefits, let alone trying to coordinate benefits for yourself and your spouse.  There are many confusing provisions of Social Security; below is a brief explanation of 3 misunderstood aspects of Social Security benefits.

Spousal benefits

When one spouse is eligible for retirement benefits, the other spouse is also eligible for a benefit based upon the first spouse’s record.  The largest Spousal Benefit is 50% of the other spouse’s Primary Insurance Amount (PIA).  The PIA is equal to that individual’s benefit available at Full Retirement Age (FRA). Full Retirement Age is 66 for folks born between 1946 and 1954, increasing to age 67 for those born in 1960 or after.

An individual may receive the Spousal Benefit as early as age 62, at a reduced rate. The other spouse must have filed for his or her own benefit – and could have suspended benefits (see File and Suspend below).

The confusing parts. The following areas always seem to trip up folks as they plan for the Spousal Benefit.

  1.  Only one of the spouses can receive Spousal Benefits at a time. The other spouse must have filed or filed and suspended for his or her own benefit.
  2.  At or after FRA, the individual can receive Spousal Benefits alone, separate from the retirement benefit on his or her own record (see Restricted Application below).  This allows the spouse receiving Spousal Benefits to delay receiving his or her own benefit, increasing that retirement benefit (via Delayed Retirement Credits).
  3.  Before FRA, filing for Spousal Benefits will result in a reduced Spousal Benefit. Plus, filing for Spousal Benefits before FRA will result in deemed filing for the individual’s own retirement benefit, with both benefits reduced. 

File and Suspend

When the individual who is eligible for a retirement Social Security benefit reaches Full Retirement Age (FRA), the individual may voluntarily suspend receiving benefits.  By suspending benefits, the individual has accomplished two things:

  1.  The individual has established a filing date for benefits. This means that the Social Security Administration has a record that the individual has filed for benefits. Since that record exists, other benefits become available based upon the individual’s Social Security record. Also, at some point in the future, the individual could change his or her mind and collect retroactive benefits from the established filing date to the present, continuing to receive monthly benefits as if the filing was never suspended.
  2. The individual will not receive benefits while the suspension is in place. If the individual does not collect retroactive benefits at a later date (see #1 above), Delayed Retirement Credits will add to his or her future benefit. This amounts to an 8% increase in benefits per year of delay.

Restricted Application 

As mentioned above, when an individual reaches Full Retirement Age (FRA) and is eligible for a Spousal Benefit, the individual may choose to file a Restricted Application for Spousal Benefits only.  This type of application provides for the individual to receive *only* the Spousal Benefit, based upon his or her spouse’s record. By doing so, he or she can delay filing for his or her own benefit to a later date.  With the delay, the individual’s own benefit will gain Delayed Retirement Credits; maximizing the benefit by age 70.

Jim Blankenship, CFP®, EA, is a fee-only financial advisor.  Check out his blog Getting Your Financial Ducks in a Row, follow him on Google+ and Facebook as well.  

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

6 Signs of a Good 401(k) Plan

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Much has been written about lousy 401(k) plans, and rightly so there are a lot of them out there.  But what does a good 401(k) plan look like?  Here are 6 signs of a good 401(k) plan.

    • Reasonable administrative expenses.
    • An investment menu that contains solid, low-cost choices, including index fund alternatives.
    • An investment committee or similar group that monitors the plan’s investments and manages the plan in accordance with an investment policy statement.
    • An investment line-up that includes some sort of a managed option for participants who are uncomfortable managing their investments. This might be Target Date Funds, or even access to direct advice.
    • The investment line-up contains choices across a wide range of asset classes.
    • The investment menu isn’t stuffed with proprietary mutual funds or a majority of choices from a single fund family. 

A few thoughts on several of these items: 

Reasonable administrative expenses 

Frankly this will be difficult for most 401(k) participants to gauge.  Depending upon how your plan is structured via your company and the plan provider all of the costs to administer the plan may be covered by the expense ratios of the mutual funds (or other investment options) offered via revenue sharing or similar arrangements.

The expenses paid out of plan assets (your account balance)  over and above what might be covered by the expense ratios of the mutual funds offered will be listed on your quarterly account statements as part of the required fee disclosures that also include separate disclosures pertaining to the plan’s investments.  They may be a bit cryptic and are usually listed as one or several line items on the statement.

To approximate what you are paying in total (including admin expenses) you will need to take a weighted average of the fund expense ratios for the investment options you hold plus these expenses listed on your statement (double check to see if these are annual or quarterly) and divide the total into your balance.

Don’t take this as a hard and fast benchmark, but anything over 1% I would consider high as many plans I have dealt with are far lower all-in.

One way to gauge where your plan falls is to check the BrightScope site and type your company’s or plan’s name in the retirement plan search are on the top right of the site.  You’ll note that if your plan is rated there will be several rankings including plan cost.  Note there is a drop down box where you can compare your plan to both all plans and also to plans in a similar size range.  This ranking is a helpful tool as a starting point. 

Low cost investment choices 

While low costs don’t guarantee good investment returns, low mutual fund expenses have been shown to be a predictor of better investment returns.

Index funds are often cited as a solid low cost investment option and for the most part this is true.  Index funds are also generally true to their investment style and in many cases out perform a high percentage of actively managed funds.

Low cost also pertains to offering the lowest cost share class available to the plan in the case of mutual funds.  Examples of low cost share classes include:

  • Fidelity’s K share class
  • Institutional (applies to many fund families)
  • Vanguard Admiral or Signal shares (the latter will be phased out and converted to Admiral shares)
  • American Funds R6
  • T. Rowe Price (not the R or Adv share classes) 

Additionally many large employers are able to offer ultra-low cost institutional options via their plan provider.

Target Date Funds and managed options 

Target Date Funds are a huge growth area for mutual fund providers since the Pension Protection Act of 2006 made them a Qualified Default Investment Alternative (QDIA).  In plain English this means that plan sponsors can direct the salary deferrals of participants who do not make an affirmative investment election into the Target Date Fund closest to their projected retirement age.  Fidelity, Vanguard, and T. Rowe Price collectively have 70% or more of the total Target Date Fund assets.

Some plans might offer risk-based accounts that invest in a static asset mix as opposed to the Target Date Funds that will reduce their allocation to stocks as the fund moves closer to its target date.  At some point the Target Date Fund will move to a glide path which is a fixed allocation to equity that the fund maintains at some point which will vary widely by fund family.

Some plans may offer access to professional management of your account.  Typically there would be some sort of fee (often charged as a percentage of the assets in your account).  In some cases the plan provider such as Vanguard, Fidelity, or others might offer this service and in other cases it might be an external vendor such as Financial Engines.

I view the availability of any or all of the above options as a positive, but I also urge plan participants to fully understand what they are investing in in terms of Target Date Funds or risk-based options.  This also applies to any professional management services as well.  Just like choosing a financial advisor of any type you need to fully understand how they are allocating your money, do they consider outside investments in making their recommendations, and are they a fiduciary. 

The investment menu 

A well-rounded investment menu should include options covering a number of domestic and international equity styles, bonds, and fixed income, as well as a cash option (typically a money market fund or a stable value fund).  In addition other asset classes such as real estate, commodities, and others could be offered depending upon demographics of the participants and the desires of the plan sponsor.

As indicated above managed options are also a good idea.  In all cases it is important that the investments carry low expense ratios.

A menu of proprietary funds from the employer of the plan’s advisor or rep is generally not a good idea as these funds are often higher in cost.  Generally a plan comprised mostly or exclusively of mutual funds from a single firm should be frowned upon, even if the funds are all from excellent fund families like Vanguard or T. Rowe Price.  No one fund family offers the best options in every asset class.

An additional item that should be considered is the company match, if any.  Obviously the larger the match the better, The reason I did not list the match above is that a company can offer a decent match in an otherwise lousy plan.  In most cases it still makes sense to defer at least enough of your salary to earn the full match as this is essentially free money.

As far as an engaged investment committee or other involvement from the organization sponsoring the plan this is critical.  I’ve worked with excellent committees even in smaller organizations. The constant here is a group that wants to offer the best plan they can for their employees and is engaged in monitoring the plan a regular basis.  Often this is done in conjunction with an independent outside financial advisor.

The above is not meant to be an exhaustive description of a good 401(k) plan, but rather to highlight some of the signs of a good 401(k) plan that I’ve seen over the years.  What features do you look for in a 401(k) plan when deciding whether and how to invest?  Please feel free to leave a comment or to contact me directly.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

New Money Market Rules – How Will They Impact You?

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The Securities and Exchange Commission (SEC) recently passed new rules governing money market funds.  These rules are designed to combat liquidity problems should the economy experience another period of crisis such as in 2008.

New Money Market Rules – How Will They Impact You?

I’ve read a few articles on this issue but I do not claim to fully understand all of the implications for investors.  I will likely do a follow-up to this post at some point in the future when I know a bit more. Here are a few items from these new money market rules that might impact you.  You might also check out this excellent piece by Morningstar’s John Reckenthaler.

Floating NAV – Institutional Money Market Funds 

For institutional money market funds the stable $1 net asset value (NAV) per share will be gone.  The NAV of these funds will be priced out to four decimal places and will be allowed to float.  Your shares may be worth more or less than what you paid for them upon redemption.

Again this applies to institutional money market funds.  Retail money market funds, defined as funds owned by natural persons, along with government and Treasury-based money funds will retain their stable $1 NAV.  From what I have been told, money market funds owned by participants within a 401(k) or similar retirement plan are considered to be retail funds as well.  I’m not quite as sure with regard to an institutional share class money market fund held by an individual investor.

Liquidity Fees and Redemption Gates 

Both retail money market funds, again excluding funds investing in government and Treasury instruments and institutional funds, will be subject to liquidity fees and redemption gates (restrictions) under certain circumstances.

  • If liquid assets fall below 30%, a fund’s board may impose a 2% fee on redemptions.  This is at their discretion.
  • If liquid assets fall below 10%, a fund’s board must impose a 1% fee on redemptions.  This fee is mandatory under the new rules.
  • If liquid assets fall below 30%, a fund’s board may suspend redemptions from the fund for up to 10 days. 

How will these new money market rules impact you? 

Money market funds will have two years from the date the final SEC rules appear in the Federal Register to be in compliance with the floating NAV, liquidity fee, and redemption gate rules.

According to Benefits Pro:

“Nearly $3 trillion is invested in money-market funds. As of July 3, 2014, more than $800 billion was held in the institutional money-market funds affected by today’s reforms, according to the SEC.” 

Among the main users of institutional money market funds would be pension plans, foundations, and endowments.  They will be the ones directly impacted by the change to a floating rate NAV; however the beneficiaries of these funds will ultimately be impacted should this change have a negative impact on the underlying portfolio.

The liquidity fees and redemption gates will directly impact individual investors.

A 1% or 2% fee on redemptions would be quite a hit to your balance, especially if viewed in terms of today’s interest rates on money market funds in the range of 0.01%.

The ability to delay redemptions up to 10 days could also have an impact especially if you had written a check off of that account to pay your mortgage or some other bill.

The true test will be if we experience the extreme conditions like those that marked the 2008-09 economic down turn.  None the less as an investor it would behoove you to ask your bank, custodian, or financial advisor how these changes might impact any money market funds you hold and also if it makes sense to switch to another cash option.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Photo credit: Flickr

5 Reasons Investors Use ETFs

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Fidelity recently polled nearly 600 high net worth investors to gain a better understanding of their thinking about the market and where they plan to invest in 2014. Notably, 43% of investors said they are planning to increase their investment in ETFs over the next 12 months.

Fidelity created this graphic that highlights 5 reasons investors use ETFs (or don’t use them).

 5 Reasons Investors Use ETFs

Other key findings of the Fidelity study include:

  • Despite the small gains this year in the DJIA (1.6% as of June 5, 2014), 55% believe it will end the year up 5% or more.
  • When it comes to the U.S. economy, investors continue to feel cautious. The majority (71%) feels it’s headed in the right direction vs. 29% who say it’s stagnant or headed in the wrong direction.
  • 62% of investors also believe a market correction—when a major index declines by at least 10% from a recent high—is likely to happen in 2014.
  • The indicators that would motivate the most investors holding cash to re-invest into the market are a stronger U.S. economy (28%) and higher interest (12%). 25% report holding no cash on the sidelines.
  • Over half (59%) of investors prefer to grow their portfolio by investing in domestic equities vs. 18% in international equities.
  • Over a third (35%) invest in ETFs for broad market exposure (indexes), while 27% of investors don’t invest in ETFs because they need to learn more. 

Advantages of ETFs 

ETFs have several features that are advantageous to investors:

  • ETFs are generally transparent regarding their holdings.
  • ETFs can be bought and sold during the trading day.  This offers additional opportunities for investors.
  • Stop orders can be used to limit the downside movement of your ETFs.
  • ETFs can also be sold short just like stocks.
  • Many index ETFs carry low expense ratios and can be quite cheap to own.
  • Many ETFs are quite tax-efficient.
  • ETFs can provide a low cost, straightforward way to invest in core market indexes.  

Disadvantages of ETFs  

  • ETFs can be bought and sold just like stocks.  In some cases this could serve to promote excessive trading that could prove detrimental to investors.
  • ETF providers have introduced a proliferation of new ETFs in response to their popularity.  Some of these ETFs are excellent, some are not.  Many new ETFs are based on untested benchmarks that have only been back-tested.  Additionally there are a number of leveraged ETFs that multiply the movement of the underlying index by 2 or 3 times up or down.  While there is nothing inherently wrong with these products they can easily be misused by investors who don’t fully understand them.
  • Trading ETFs generally entails paying a transaction fee, though a number of providers have introduced commission-free ETFs in order to gain market share.  

ETFs have proven to be a great innovation for investors.  If used properly they are a great addition to your investing toolkit.  Like any investment make sure you understand what you are investing in (and why) before you invest.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Buying Life Insurance – 5 Questions to Ask

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This is post was written by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends.  I have spoken with Ike many times for advice on client-related issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix.  Here Ike offers some practical advice to anyone who is considering buying life insurance.

Knowing the right questions to ask before buying life insurance is a key issue for consumers, especially considering the significant investment often involved and the exit costs involved in buying the wrong policy.

Covering all the options and nuances available in the life insurance marketplace in anything less than book form is nearly impossible. Here are 5 questions to ask before buying life insurance.

What is my annual premium and can it change?

This is the amount the insurance will cost you every year. In some cases the premium is fixed and in other cases it can change based on variety of factors such as the performance of the stock market and other indices. Make sure you understand your obligations before buying life insurance.   What you will lose or be left with if you don’t make what the policy expected and what was actually illustrated?

What does the policy illustration tell me?

I see lots of bold promises and spit-ball estimations of future performance made by insurance agents. The policy illustration is all that matters, so any conversation about what could happen if the policy exceeds the expectation that the illustration creates is moot; don’t engage in it and instead ask about the “minimum guarantees” if one exists at all. That’s the minimum you’ll earn in the policy if the worst happens. Remember, the column on the far right in most illustrations is the “perfect world” scenario, so look at and have the others explained as well.  Be sure to challenge all assumptions made in the policy illustration, as the saying goes if it sounds too good to be true it just might be.

Does this policy have a cash value?

The cash value is the amount of premium that builds up inside the policy and that may be available to the policy owner in the future. Some policies, like term insurance, have no cash value, while others have it immediately and some build it up over time. Be clear if yours does and exactly when it will be available if you need it and under what terms.

Roger’s comment:  Note that term insurance may be the appropriate vehicle for your needs.  Every situation is different; make sure that you are clear as to your reasons for buying the policy.  Life insurance is often a poor performing, high cost investment or retirement savings vehicle.  It may behoove you to pay only for the death benefit that you need and use more traditional investment vehicles for your investing and retirement savings needs.

Is my policy protected from creditors?

Know what the laws in your state of residence are and if your policy and both the cash value and “death benefit” (dollar amount paid upon your death) is protected by law or not. Asset protection of liquid assets is always a key focus of my concern. If the law is not in your favor, some simple trust planning can often protect your policy from both estate taxes and more active threats.

How long will my policies last, what is my exit strategy?

Again, this goes back to the illustration and specifies how long the coverage will be in place at a specific cost and what the death benefit will be through the term of the illustration. In some cases, keeping the policy alive may have significant increased costs while in others you may be able to reduce the death benefit to keep the premiums level or to stretch the policy for a longer period of years. Find out how flexible your policy will be in the future and weigh that as part of your risk-and-liquidity analysis.

Find out what happens if you can’t or don’t want to continue to make premium payments. With term insurance you usually lose what you paid; that’s OK, think of it the way you might car insurance. Other policies that were structured to have a future cash value or that have a current cash value early on however may have significant “surrender penalties.” Know what happens if you walk away and what options the policy may provide, including the specific surrender penalties that may be imposed in the policy. Do you have a need for life insurance in retirement for example?  The carrier could, for instance, keep all the cash value you built up if you don’t keep it for a minimum number of years.

This list just scratches the surface and is deceptively simple. Our goal here was to introduce some of the key concepts and questions you must be familiar with, so you can do your own due diligence when buying life insurance, whether a simple term policy or a complex premium-financed strategy with a triple-reverse galactic split dollar that includes a trip to the Bahamas to read the policy.

Roger’s comment:  Life insurance is a versatile and often complex financial tool that can have uses in estate planning, asset protection, as a business succession tool, and it can provide a death benefit to your family.  Make sure you fully understand why you are buying life insurance, don’t just succumb to a slick sales pitch.

Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com. 

As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation.  

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Money Conversations – Caring for Aging Parents

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Thanks to Cheryl J. Sherrard, CFP®, NAPFA Registered Advisor and Director of Planning for Clearview Wealth Management in Charlotte, NC for contributing this post.  

This post is a follow-up to my recent post Family Financial Conversations and to the post previously contributed by Cheryl’s colleague Megan Rindskopf Meaningful Family Conversations for the Holidays.

We all know that when we get married, we marry the entire family.  What we may not realize is that each of us comes into a marriage with expectations about how we will interact with and assist our families.  Most couples talk about and come to consensus on topics such as when to visit which set of parents and can usually resolve that by rotating holidays with their respective families.

However, the discussions you may not have had revolve around each of your expectations surrounding caring for aging parents and in-laws.  You may be fortunate if the prior generation has already dealt with planning for any needs that will arise in their later lives, but you and your spouse should consider what you know about their current situation, their preparedness for unexpected issues and your ability and willingness to help and supplement their care if needed. While we can’t control the specific course of events nor the time frame of how our parents age, married couples can and should proactively discuss what their expectations are and how they want to approach caring for aging parents should a need arise.

Stuck in the middle

Consider the following;   a married couple are in their fifties and are busy saving and preparing for their eventual retirement.  They both work outside the home in fulfilling careers and can finally see the end in sight for college tuition payments for their children.  Because they fully paid for their children’s educations, they believe that if they save aggressively over the next ten years, they can reach their retirement goals.   Suddenly, the husband’s mother experiences a stroke and needs extensive rehabilitation, which the husband automatically assumes they will assist with.  He doesn’t want his mom rehabbing in a facility; he wants to move her into their house and care for her there.  

However, because of the demands of his career, care and coordination for his mom would likely fall to his wife and would require her to work part-time or not at all.  The wife never considered moving parents into their home in the event of a need and although she loves her mother-in-law, she isn’t sure it would be good for their marriage or her relationship with her MIL to bring her into their home.  She is happy to coordinate care and assist on occasion, but she isn’t sure how their family can aggressively save for their own retirement if she has to scale back on work in order to provide care to her MIL.

Caring for aging parents takes planning

The example above illustrates a case where an in-depth discussion between husband and wife well in advance of any parental issues may have eliminated some misunderstandings and potential disagreements down the road.  Caring for aging parents can be stressful enough simply because it is difficult to see them struggling.  Combine that with the stressors of parents vs. in-laws, the demands of careers, teen or young adult children, saving for retirement and you have a recipe for stress and strain in a marriage.

What should you be talking about with your significant other, prior to the onset of any parental aging issues?

  • What are the expectations each of you have for how you want to care for your parents if they need your help?
  • Are the relationships (spouse, children, parents, in-laws) strong enough to withstand one of the parents being assisted by you?
  • What are your parent’s expectations for how they would want to handle a long-term care need if it occurred?
  • Do your parents have adequate resources, either assets or appropriate insurance, to cover the cost of paid caregivers?
  • Does your home have adequate space to accommodate the additional person, as well as provide some level of privacy for them and you?
  • Will daily care of a parent further inhibit your ability to adequately save for your own retirement?
  • If you decided to assist, which of you would be the likely caregiver and why? 

These are just a few of the questions that spouses/partners need to discuss, well in advance of any need on the part of a parent.  It is important to know that there is no right answer, as it will vary by the circumstances of each family and extent of the parent’s care needs.  Recognize that even if you do plan, things may change and you will have to be flexible to deal with whatever the situation presents.  However, having the discussion in advance will help to eliminate some of the stress on your relationship by bringing expectations out into the open and working to find common ground for the two of you.

Cheryl J. Sherrard, CFP®, NAPFA Registered Advisor is Director of Planning for Clearview Wealth Management in Charlotte, NC.  Cheryl can be reached at csherrard@cvwmgmt.com and via Twitter.  

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.