By: Vanessa McElwrath, CFP®, Wealth Management Partner
As the seasons of life change, adults may need to assist aging parents with issues related to money and finances. Although talking finances can be emotional for all parties involved, it’s better to have these conversations sooner, while everyone is still healthy and actively engaged. If you broach the topic with clearly defined goals and objectives, it can prove to be a very constructive and healthy discussion to prepare the family for unexpected challenges down the road.
Here are a few tips to help jumpstart the conversation.
Take Inventory and Simplify
Talking finances with aging parents can be emotional depending on the family dynamics. To help alleviate the stress, it’s best to start with the easy, low hanging fruit. Start by taking an inventory of all financial accounts- where they are and what they are used for. Consider whether any be consolidated or closed to streamline and simplify the number of accounts to manage.
Map out a Spending Plan
To ensure that your parents’ assets can last throughout their twilight years, you should map out a spending plan. Although a delicate balancing act, you want to make sure that your parents can maintain their standard living but also keep withdrawals from retirement accounts within a sustainable range.
To start, you should have a good understanding of their sources of income as well as expenses to create a budget. On the income side, you want to outline inflows such as social security, annuities, pensions, or investment income used to fund their living needs. You want to have a good grasp on the variability and stability of these inflows.
On the expense side, determine the major expenses needed to maintain their lifestyle and see if any adjustments need to be made. Consider eliminating some of these unnecessary or unwanted expenses and determine if the funds could be better used elsewhere. For instance, perhaps your parents no longer need the life insurance policy, and they could instead use the funds to hire in-home healthcare. Or perhaps they are growing tired of the high costs to maintain the family home and would like to downsize to an easier to maintain property. Finally, to make expenses more manageable, look to simplify by setting up automatic bill pay for any recurring expenses.
Review their Asset Allocation
Look at how their investment assets are invested. Ideally, their investments should be broadly diversified, and the overall mix of stocks and bonds should be appropriate given their age and tolerance for risk. If needed, adjust the overall allocation or rebalance the portfolio. It’s generally good practice to periodically sell off gains from winners and reallocate the gain across securities that have lagged. Although this may seem counterintuitive, this establishes a disciplined process to consistently sell high and buy low. Be sure to give extra scrutiny to any particularly expensive or opaque investments. If any particular investment is hard to understand or sounds too good to be true, it probably is.
Don’t Forget Required Minimum Distributions
If you parent is over 70.5 years old, you should confirm that any Required Minimum Distributions (RMDs) are being taken from IRA accounts in a timely manner. Extra careful attention is needed here as RMDs are easy to miss and the penalty is steep- 50% of the RMD amount. As an example, if the RMD is $10,000, a $5,000 penalty could be assessed on top of the tax already owed.
Review Legal Documents
Make sure to review estate planning documents and confirm they are up to date. A standard set of documents should include a last will and testament, Durable Power of Attorney, Medical Power of Attorney, HIPAA Authorization, and Directive to Physicians. Important details to review include any named executors, agents, beneficiaries, and trustees. You should confirm that the appropriate people are named and that backups have been designated as well.
Make sure to also review beneficiary information on retirement accounts, life insurance policies, and annuities. Since these accounts do not pass according to instructions outlined in the will, beneficiary information should be accurate and up to date here as well.
I strongly encourage having an estate planning attorney draft and execute these key documents. Often, it’s a much bigger headache (and ultimately much more expensive) to not have a proper will in place.
Talk About Scams and Frauds
It’s important to have a conversation about the various types of scams that anyone call fall prey to (not just seniors). Among the most common, phone calls from someone claiming to be from the IRS or Social Security asking for credit card or bank information or people claiming to be calling on behalf on grandchildren who are in trouble.
These conversations can signal a reversal of roles that all parties aren’t quite comfortable with yet. Make sure to involve your parents in the conversations and have them drive major decisions. It can be particularly helpful to engage an impartial expert, such as a trusted wealth advisor, to help facilitate these difficult conversations and execute a long-term plan. At ML&R Wealth Management, we have several advisors that can help. Contact us to learn more.
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