How to Factor Family into Your Retirement Plan

Factoring family into your retirement plan – and other aspects of annual financial planning – often calls for significant change. Your retirement plan when you’re married will look completely different from planning for one person’s retirement when you’re single. You not only have to consider your own needs and retirement dreams; you also have to consider your spouse’s. If you have kids or parents who rely on you for support, financial or otherwise, that further complicates your planning.

When you make an annual financial plan – or update the plans you've already made – you need to review these needs and see what might require adjustments. Here’s a look at how your family might factor into your retirement plans and how to manage the challenges that come with considering multiple people’s priorities.

Saving for Kids to Attend College

Many parents want to pay for their kids to attend college, but feel the pull of competing financial demands.

“College saving can be a daunting task, especially with multiple children,” says Michael Briggs, an investment adviser representative with NEXT Financial Group at Horizon Investment Management Group in Springfield, Mass. “The advice I give my clients is, when having to choose between college saving and your own retirement, always choose your own retirement first.”

Parents’ contributions to their own individual retirement accounts (IRAs) can be used for their children’s educational expenses, but money placed in a 529 plan can’t be used for non-educational purposes without paying taxes and penalties. “Just think of being on a plane – they tell you to put your own mask on first and then help the other person. The same applies when choosing where to put your funds,” Briggs says.

Another benefit to prioritizing retirement savings over education savings is that money in qualified retirement accounts isn’t counted as an asset on the Free Application for Federal Student Aid (FAFSA). That means they don’t count toward your family’s expected financial contribution. Money in 529 plans in parents’ or students’ names is counted toward your family’s expected financial contribution and can reduce financial aid by as much as 5.64%.

Sharon Marchisello, author of the personal finance e-book Live Cheaply, Be Happy, Grow Wealthy, agrees that funding retirement should be higher on your list than sending the kids to college. Your kids have other options for paying for college – including scholarships, part-time work and student loans – but you won't be able to borrow your way through retirement. “You help your children more by being self-sufficient, so you don't have to ask for their support in your old age,” she says.

So first plan what you'll be saving for retirement; then see what you might be able to put aside to help with college for your children.

Caregiving for Elderly Parents

Speaking of caring for parents who aren’t financially self-sufficient in their old age, review whether this burden is likely to fall on your family. If the answer is yes, there are proactive steps you can take to defray how caregiving for elderly parents could derail your current and future financial plans.

♦ Long-term care insurance

The U.S. Department of Health and Human Services estimates that about half of Americans who turned 65 in 2015 will need long-term care services. (See Your Complete Guide to Long-Term Care Insurance.) Long-term care can be financially devastating. According to Genworth’s 2016 Cost of Care Survey, a month in a private room in a nursing home costs nearly $7,700. Imagine paying that expense for months or even years.

It's best to start planning for this before your parents are actually elderly. “If your parents are approaching age 60 and you can afford long-term care Insurance, paying the premium now may save you much more later if a parent needs to go into a nursing home,” says Oscar Vives Ortiz, a CPA financial planner with First Home Investment Services in the Tampa Bay–St. Petersburg area of Florida.

Ask yourself whether this is the year you need to buy long-term care insurance for any of your parents – or make sure that those parents have purchased it for themselves. For every year that you postpone buying this insurance, you face higher rates based on the insured’s increased age; rates can increase even further if health problems develop, or it might become impossible to get insurance at all. If your parents are paying, be sure that they keep up with the premiums – sometimes you can sign up to be alerted if an older person hasn't been paying the bills.

Either life insurance or an annuity with a long-term care component offers an alternative to long-term care insurance that may be more practical for some families. (See How Long-Term Care Riders on Life Insurance Work and LTC Annuities: 2 Safety Nets in 1.)

While you and your spouse are planning for your parents’ long-term care needs, you should be thinking about your own as well.

“In many situations, it’s almost better financially for your spouse to die than to go into a long-term care facility,” says Richard Reyes, a certified financial planner based in Orlando, Fla.

He adds that planning for long-term care can also give you more flexibility in that you won’t have to depend on the government, your children or your neighbors to take care of you; you’ll be able to call the shots. (See The 4 Best Alternatives to Long-Term Care Insurance, Medicaid vs. Long-Term Care Insurance and The Crippling Cost of Self-Insuring Long-Term Care.) “If you have no care insurance or have not planned adequately for care, then obviously the only flexibility you have is what others have planned for you,” Reyes says.

“If you go on Medicaid, your care will be what the government prescribes it is, and who takes care of you is based on where and when there is space available for you – not a great solution,” he adds. (See How to Pick the Right Nursing Home and Things Nursing Homes Are Not Allowed to Do.)

There are also many problems with depending on family. Your kids may not live nearby or may have their own issues, concerns and families to take care of. A spouse you depend on will likely be close to your age and have diminished physical capacities.

“When someone gives me lip about having long-term care, I tell one of the spouses to lie down on the floor and ask the other to pick them up and carry them all around the house and in and out of their vehicle,” Reyes says. (For further reading, see How to Choose a Residential Care Home and The Pros and Cons of Smaller Long-Term Care Facilities.)

♦ Life insurance

Life insurance with a living benefit or long-term care rider can help pay for long-term care as it’s needed. But life insurance can also be a tool for reimbursing family members who help with long-term care after the loved one who needed that care passes away.

“If you feel that you have to spend some of your money taking care of your elderly parents, then try to make sure that any life insurance policies that they have list you as beneficiary to repay you and replenish your investments upon their death,” says Rick Sabo, a financial planner with RPS Financial Solutions in Gibsonia, Pa.

If your parents don’t have life insurance, can’t afford it and are likely to rely on you for help when they’re older, talk to them about purchasing a guaranteed universal life insurance policy that you and your spouse will pay the premiums on. Unlike term life insurance, which your parents could outlive, you can purchase guaranteed universal life insurance that lasts until age 121, making it essentially a permanent policy, but at a much lower cost than whole life insurance.

You and your spouse may also want to carry your own life insurance policies. The younger you are when you purchase it, the less expensive it will be. The policy’s death benefit could be a godsend if a breadwinner or homemaker passes away prematurely. (See Insuring Against the Loss of a Homemaker and Is Your Employer-Provided Life Insurance Enough?)

Retirement Timing

People of any age can start establishing retirement goals by thinking about how they want to live during retirement. Saving will be much easier when you know what you’re saving for, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping and personal loans. Think about where you will live, if you will move to a smaller home, whether you plan on traveling and whether you will want to work part-time. Plan to live on 80% to 85% of your current income once you retire.

To fully understand what your retirement income will be, make sure you understand any pension you’re entitled to, review all your investments and estimate your Social Security income, Gallegos says.

Planning retirement with a spouse is more complicated than planning retirement for just yourself. You’ll need to create a shared vision for what your retirement will look like. You’ll also need to agree on whether you’ll both stop working at the same time or whether it makes sense for one spouse to retire first. (See What’s the Best Retirement Drawdown Strategy for You? and Could Your Retirement Portfolio Handle Another Financial Crisis?)

Age differences between spouses are common, and these can create issues in retirement planning. At retirement, if you are 66 and your spouse is 62, for example, you will be able to get health insurance through Medicare, but your spouse won’t until age 65. That’s an expense of potentially $600 to $700 a month for premiums that you must plan for, Reyes says.

Other issues to sort out include when to claim Social Security, how one spouse’s claiming decision could affect the other’s benefits and how to claim pension benefits in the way that will be most beneficial to the spouse. (Learn more in How to Help Clients Navigate Pension Payments and How to Navigate Spousal Benefits Under New Social Security Rules.)

The Bottom Line

Annual financial planning for a family requires considering the needs and desires of everyone involved. You need to make strategic decisions about funding your retirement, helping children with their college expenses, caring for elderly parents, purchasing long-term care insurance and life insurance, and timing your retirement and that of your spouse.

If you plan ahead for each of these items and learn about your different options and the consequences of each choice, you’re less likely to face unpleasant surprises and financial struggles that could prevent you from retiring when and how you want to. Once you have a basic plan, review these decisions and expenditures each year to see whether any adjustments need to be made.