With just over 57.5 million Americans age 60 or older, it is becoming more common for parents to move back in with their children. Mellody gives advice for covering the added expenses.
My husband and I have just agreed to let my retired parents move in with our kids and us to help keep them financially afloat, but haven’t got any idea what to expect. What should we be thinking about? – Kimberly, Chicago, IL
With just over 57.5 million Americans age 60 or older, this is an occurrence that we are seeing more and more often. In fact, according to the latest American Community Survey, which used 2010 Census data, 2.2 million people over 60 lived in households in a non-responsible role with younger generation family members. So Kimberly is not alone in this situation, not by a long shot.
When it comes to helping to pay for my elderly parents’ expenses, should I spend down my assets before tapping into theirs?
Generally speaking, you should do everything possible to avoid tapping into your own retirement savings in an effort to defray your parents’ costs. I cannot stress this enough—you need to make your own retirement savings a priority. If you are not saving for yourself, it will create a vicious cycle for your family—continually shifting the burden to your children and their children and so on. We have seen the data of this cycle play out through our Black Investor Study that we co-sponsor. And every year it is difficult to hear that the cycle isn’t breaking.
So what other ways, besides tapping into my own savings, are there to help pay for my parents’ retirement and health care needs?
If your or your spouse’s employer offers a dependent care or flexible spending account, you should sign-up immediately. These accounts allow you to defer up to $5,000 in pre-tax dollars—meaning your taxable income is lowered by the amount you contribute—to put towards the costs of care for a child or other qualifying person. An elderly parent would qualify if they were physically or mentally unable to care for themselves and they meet certain other criteria similar to those for the dependent care credit. The $5,000 is per household so you if you and your husband were to both open a flexible spending account for dependant care then you’d only be able to save $2,500 each.
Are there any other strategies that would enable some sort of tax relief?
There are, but it can get a little tricky. Depending on your income and the income of your parent, the IRS can actually provide some financial relief. If you are caring for an elderly parent and you declare them as your dependent—much like you would any child who is living in your house you could receive a credit. But you must be able to prove that you are providing 50% or more of their support. Additionally, the IRS allows you to deduct medical expenses you make toward your parents’ care as well as the cost for a caregiver. Again, there are a number of restrictions so the best thing to do is go to www.irs.gov to learn more about the qualifications.
Are there other safety nets to help retirees?
Yes, many seniors are sitting on an asset which can be a significant retirement life-line—their home. If your parents own a home, it can be an important asset to help them cover their costs by either selling the home outright or applying for a reverse mortgage. Reverse mortgages let you tap into home equity and repay the loan with proceeds from the eventual sale of the property. The greatest appeal of a reverse mortgage is that you can be guaranteed a source of monthly income for as long as you need it. The downside is that by tapping into your home equity, you reduce the amount of money you leave to your heirs upon your death—this downside is minimized, though, if it enables the senior to continue to support themselves without having to financially rely upon their children.
What about getting help with medical expenses?
Their first line of defense is Medicare, which is health insurance provided by the federal government to people who are 65 years and older or younger people with disabilities. To qualify for basic Medicare coverage with no premiums—also known as Medicare A—a beneficiary or his/her spouse must have worked and paid Medicare taxes for a minimum of ten years. Medicare A provides coverage for certain expenses related to limited stays in nursing homes, home health agency care and hospice care. Although Medicare will not pay for stays in assisted-living facilities, it may cover the costs of some services—including home health care and doctors’ visits—provided in these facilities.
After personal savings are exhausted, many seniors will qualify for Medicaid. Jointly funded by the federal and state governments, Medicaid provides health insurance to those who are low-income as well as those who are 65 years and older, disabled or eligible for other government aid. Medicaid offers Medicare beneficiaries assistance with their out-of-pocket expenses and also covers the costs of prescription drugs, eyeglasses, hearing aids as well as other services not covered by Medicare.
Finally, can you give us some advice on how to approach the conversation with my parents about taking over their finances should the need arise?
This is a very hard conversation—much like the discussion many people have with their elderly parents about driving. The best way to approach this is as open and straightforward as possible—the harsh reality is that not knowing about your parents’ assets could cost you and them financially. It is key you know the location of all of your parents’ accounts as well as their assets and debts. Often the most difficult financial decisions are made at a time when there is great personal loss or crisis—which is not the best time to try to get your arms around finances. So, have this conversation now.