It’s natural to want to support our parents in their later years, just as they supported us during our formative years. Genuine sentiment aside, doing so has proven to be a real challenge for many, especially those in their 40s. This group, often referred to as the “sandwich generation,” is caught between juggling the financial responsibilities of caring for their aging parents as well as their own children.
A 2022 study by the Pew Research Center revealed that more than half in this age group (54%) have a living parent age 65 or older and are either raising a child younger than 18 or financially supporting an adult child.
Many families are already struggling to save sufficiently for their own retirements. According to the 2022 Survey of Consumer Finances, the most recent data from the Federal Reserve, the average retirement savings for all families in the United States was $333,940, while the median savings was significantly lower at just $87,000.
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Despite those challenges, it is important to note that helping your parents doesn’t have to mean jeopardizing your own financial plan. Assistance can take many forms and involve different levels of commitment. Here are three important areas where you can support your parents while working to safeguard your own financial plans.
1. Estate planning
Encourage your parents to have an up-to-date estate plan. This includes individual wills, trust documents, durable powers of attorney and medical directives. All documents should be properly signed and executed. Ask your parents to provide you with a copy of each document so you can review them together and keep them as a backup copy in case theirs go missing, especially in a time of need.
As a general rule of thumb, estate plan documents should be reviewed for accuracy and completeness every three to five years, particularly as assets or relationships evolve. Additionally, remind your parents to review and update their retirement account beneficiary designations for accounts like IRAs and 401(k)s.
2. Cash flow planning
Many older adults worry about making their financial ends meet each month. Out-of-pocket medical expenses not covered by Medicare or supplemental health insurance can quickly overwhelm many households. For many individuals 65 years or older, one of their primary sources of income is Social Security, and it may not be sufficient to offset expenses.
I suggest working with your parents to get a real-time assessment of their household cash flow. The objective should be to reduce discretionary expenses where possible and maximize cash flow from available sources. It is important to also keep in mind any potential tax implications. A simple Excel spreadsheet can help you and your parents track income and expenses, or you can use more advanced tools like Quicken or Credit Karma.
If possible, I also encourage your parents to build and maintain an emergency savings account with a balance equal to three to six months of their average monthly household expenses. This account should remain in liquid cash to ensure funds are available to pay for unplanned expenses.
3. Tax planning
Having a competent and proactive tax professional can help your parents. This professional can assist your parents in managing tax obligations, such as making required minimum distributions (RMDs), setting up qualified charitable distributions (QCDs) or gifting cash and other assets to family members.
Given the increasingly complicated tax landscape, it’s best to consult directly with a tax expert to assess your parents’ tax situation. This isn’t an area to navigate alone.
Supporting aging parents is a common and evolving discussion I have with many of my younger clients. It’s rarely a one-time discussion, as needs and options evolve over time. Working with a Certified Financial Planner (CFP®) professional is a great way to help ensure that you understand your options and can make confident decisions that positively impact both your parents and your own family.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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