If you’re caring for aging parents, one of the biggest questions you likely find yourself asking again and again is, “How long will my parents’ money last?” If they drain all of their savings and have limited sources of income, you might have to reach into your own pockets to help pay for your parents’ care.
Of course, you likely are willing to help. They are your parents after all. However, it’s probably a situation you want to avoid if possible. With careful planning, though, it might be possible to stretch what savings and financial resources your parents have to cover their needs. Even if you can’t entirely avoid footing some of their bills, you may be able to buy yourself more time before you have to provide financial support by taking these steps to figure out how long your parents’ money will last.
Step 1: Figure out how much is coming in vs. going out
When trying to determine whether your parents will have enough money in retirement, you should first figure out if their monthly spending exceeds income from reliable sources such as Social Security and a pension, says John Cooper, a Certified Financial Planner™ professional with Greenwood Capital Associates. This will be simple enough if you are your parents’ power of attorney and already have access to their bank account online. View a monthly statement to add up expenses then subtract them from the amount they are receiving from Social Security or a pension.
If you’re not yet involved in your parents’ finances, you could offer to help your parents create a budget to find ways to cut costs or to ensure their money lasts. Then you can go through their bank statements with them or log onto their account to make a list of monthly expenses and income amounts.
Another option would be to ask if they’re willing to sign up for Carefull, which will monitor the accounts they link to the app and let you see what money is coming in and going out.
If your parents’ guaranteed sources of monthly income cover their expenses, you don’t have too much to worry about, Cooper says. However, if their monthly spending exceeds their guaranteed sources of income, you need to figure out what other sources of income they’re drawing on to cover costs.
[ Read: A Financial Caregiver’s Guide to Social Security Benefits ]
Step 2: Determine how much they have in savings
Your parents might be tapping a stash of cash or investments to cover costs in retirement. It’s important to know what types of accounts they have and how much is in them if they’re relying heavily on them.
Savings accounts, money market accounts, savings bonds, certificates of deposit and fixed annuities are low-risk places for your parents to keep their cash. However, low risk equals low returns. That means if your parents’ money is in any of these types of accounts or savings instruments, it won’t grow much over time. If their rate of return doesn’t keep up with the rate of inflation, their purchasing power will decrease and their money might not go far enough in their retirement.
If your parents’ money is invested in stocks or stock mutual funds, there’s more opportunity for growth. There’s also the risk that the value of their portfolio could drop dramatically during stock market downturns. To keep risk in check while maintaining the potential for growth, financial advisors often recommend that retirees have a portfolio with a mix of stocks, bonds and cash.
Step 3: Calculate your parents’ withdrawal rate
To figure out how long your parents’ savings or investments will last, you need to know the rate at which they are withdrawing money. Don’t worry: This doesn’t involve calculus or even advanced algebra.
Go back to Step 1. How much does your parents’ monthly spending exceed their guaranteed sources of income? Let’s say they’re withdrawing $1,000 a month from savings or investments. That’s $12,000 a year.
Now, divide that number by the total amount they have in savings. If they have, say, $100,000 in savings, the calculation would look like this: 12,000/100,000=0.12. Multiply that by 100 to get the withdrawal rate: 12%.
If that $100,000 was in a savings account earning just 0.1% and your parents were withdrawing 12% a year, they would run out of money after eight years and five months. If their money was invested in stocks and earning 7% annually, it would last 12 years and three months with a 12% withdrawal rate.
Bankrate has a savings withdrawal calculator you can use to figure out how long your parents’ savings will last.
Step 4: Make sure your parents aren’t withdrawing too much
Traditionally, a 4% annual withdrawal rate has been seen as a safe withdrawal rate. “If you’re drawing 4% or less of the value of an investment account year over year, it was highly unlikely that you would outlive that investment account,” Cooper says.
That rate is based on the assumption that withdrawals would last for 30 years and come from a portfolio that was invested 50% in stocks and 50% in bonds. Cooper says many advisors now assume that a 3% withdrawal rate is a safer bet to insure that retirees’ money will last.
If your parents are withdrawing much more than 4% a year from savings, Cooper says they could be headed for trouble.
Of course, there are a lot of variables that can come into play that can affect the rate at which your parents should be withdrawing money from savings or investments: their expenses in retirement, their portfolio composition, their rate of return, their tax rate and their life expectancy. But if your parents are withdrawing much more than 4% a year from savings, Cooper says they could be headed for trouble. “When you start getting up to 10%, you’re really exponentially withdrawing money that is going to cause it to run out,” he says.
[ Read: 12 Ways to Help Aging Parents Save Money ]
Step 5: Find Ways to Make Your Parents’ Money Last Longer
There are a variety of ways your parents can boost their income in retirement. Some require taking action before taking action before your parents retire. All will likely require you to talk with your parents about your concerns and share suggestions. As you discuss these options with your parents, make sure you do so in a respectful and loving manner.
Delay claiming Social Security benefits: If your parents haven’t retired already, they can boost their Social Security benefits by working longer and waiting to claim their benefits past their full retirement age.To receive their full benefit, they must wait until their full retirement age of 66 to 67 (it varies depending on birth year). For each year they wait from full retirement age until age 70 to claim benefits, the amount of their benefit will increase by 8%, Cooper says. Waiting to claim benefits “could make the difference between struggling on Social Security to getting by,” he says.
Choose the right pension payout option: Pension plans typically offer a variety of payout options: a lump-sum payment, a single-life option that produces a stream of lifetime payments that end when the pension recipient dies, and a joint and survivor payout that will continue to provide payments for a surviving spouse when the pension recipient dies. If only one of your parents has a pension, choosing the single-life option will produce bigger monthly payments but will leave the surviving parent with nothing. A joint and survivor payout will reduce the monthly payment but ensure the surviving parent receives 50% to 100% of the monthly payment the other parent was receiving.
If your parents are thinking about moving to a smaller house or apartment, encourage them to do it sooner rather than later.
Get the right asset mix for retirement savings. As the withdrawal rate illustration above shows, your parents’ savings can go further if the money is invested in assets with a higher rate of return than what a standard savings account offers. That doesn’t mean all of their money should be in one or two stocks. Investing in an index fund that tracks the performance of a major stock index along with bonds or bond funds and keeping some cash in a money market account or savings account can reduce overall risk while providing some opportunity for growth.
Downsize sooner rather than later: If your parents are thinking about moving to a smaller house or apartment, encourage them to do it sooner rather than later. Not only will they save money on house payments, but also their property tax bill and utilities will be lower. Then they can put that extra money toward paying down debt or increasing their savings.
Consider a reverse mortgage: Your parents may be able supplement their income with a reverse mortgage if they are 62 or older and own their home or have paid off most of their mortgage. The money from a reverse mortgage (also known as a Home Equity Conversion Mortgage) can be received as a lump sum, in monthly payments or as a line of credit. Reverse mortgages aren’t ideal for everyone because they have high fees and will essentially leave the homeowner without a home to pass on to heirs (unless their heirs want to pay off the loan). However, they’re helpful for people who need extra income but have no desire to leave their home, Cooper says.
The best bet is to help your parents hire a financial advisor who can calculate how long their money will last and help them create a solid retirement income plan to stretch the resources they have as far as possible. If your parent has very limited income and assets, reach out to your parents’ local Area Agency on Aging, which can help connect them with support services and benefit programs.
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