Many parents do everything in their power to teach their children how to handle money effectively, using piggy banks, allowances and other tools designed to help their children learn the value of a dollar. However, as time passes, those roles begin to reverse. Children grow up and have kids of their own and parents retire, and begin to feel the effects of aging. Children who are now in their 40s and 50s may need to start thinking about helping their aging parents manage their money, in the final stage of their lives. This can be difficult in some cases, but there are things that can be done to ease the process. (To make the most out of your dollars, check out 5 Ways To Stretch Your Retirement Budget.)
TUTORIAL: Retirement Planning Basics
Impact of Aging Upon Financial Management
As with all other areas in life, age can eventually reduce a person's ability to manage their money and make sound financial decisions. As the brain slows and shrinks over time, the resulting cognitive impairment can have an adverse impact upon one's ability to evaluate financial information and act on it properly. Old age can make dealing with finances more difficult, as older people simply have less energy to devote to practical matters, such as paying bills or balancing the checkbook. Of course, other conditions related to aging, such as diminishing hearing and eyesight, arthritis and Alzheimer's, can quickly destroy the ability to manage one's finances and other worldly affairs, in any capacity.
In many cases, older couples have divided various financial tasks between them, where perhaps the wife pays the bills and does the shopping, while the husband makes the investment decisions. Although this arrangement can work well while both spouses are living, it means that when one spouse dies, the surviving spouse may immediately face a number of financial chores that they are unable to perform. This type of sudden adjustment can lead to serious and costly financial and estate planning errors, especially if the surviving parent is too stricken with grief to be able to think clearly.
Older couples with both spouses still living can encounter these pitfalls, as well. This is where children often have to step in, teaching their parents the necessary skills to perform the other spouse's duties, when necessary, or else performing them for him or her.
Facing the Problem
There are many issues to consider when it comes to helping aging parents with their money. A good place to start is with health and long-term care insurance coverage. If parents aren't adequately covered in this area, it may be a wise idea to pay for it for them, if possible, because the cost of the coverage could be minuscule, compared to the expenses that may be incurred at some point without it.
An honest assessment of their retirement savings should be the next step. Investment portfolios should be analyzed to see if they fit the parents' risk tolerance and investment objectives, as their financial advisors cannot necessarily be counted on to do this for them properly. Going over the parents' budget and balance sheet may also be a good idea. If the parents are not able to make ends meet with their current income, then adjustments need to be made here as well. (For ideas on how you can reestablish your budget, read Bloated Budget? How To Trim The Fat.)
How to Help
In many cases, it is a good idea for at least one of the children to add themselves onto their parents' financial and other accounts as a person of interest, thus providing an informal means of monitoring their parents' finances. This can alert children to potential problems such as late fees, missed payments for mortgages, utilities or other obligations, or large withdrawals from savings for unspecified reasons. Of course, setting up automatic bill payments and online banking can go a long way towards resolving these issues.
It may also be a good idea to set up direct deposit for all of their sources of income that permit it, such as Social Security, pensions and IRAs, thus reducing the number of trips that they have to make to the bank. If parental savings are inadequate, then now may be the time to assist them with this, as well, since this will give additional funds the greatest amount of time to grow.
A reverse mortgage could also be a key source of income for those who have substantial equity built up in their homes. Children may also need to consider more practical solutions, such as having their parents move in with them or devoting substantial time or resources for caring for them, at their own residence.
One of the most important aspects of helping parents with their finances, is making certain that children have the legal authority to act on their parents' behalf, if necessary. In some cases, children can add themselves onto their parents' accounts as joint tenants, which can allow them to write checks or pay bills on their parents' behalf, if they become unable to do so themselves. However, this can have adverse gift and estate tax ramifications in some cases. If joint accounts cannot be used, then durable and medical powers of attorney and living wills need to be put in place, which will enable a designated executor to make financial and medical decisions, on the parents' behalf.
Meeting with each of the parents' advisors is also recommended, if possible, so that they are acquainted with the children when they settle the parents' estate. Children should also make sure that all of the beneficiaries on their parents' accounts and insurance policies, are specified correctly and that none of their assets will go through probate. This can be done by placing parental assets inside a revocable living trust or specifying a transfer on death appointment, for each non-retirement account.
The Bottom Line
Adult children with aging parents who need help with their finances, should not hesitate to discuss these issues with them, albeit in a non-threatening manner. It is also important for children to allow their parents to retain as much of their independence as possible and respect their personal boundaries. Those whose parents are unwilling to deal with this issue, may need to seek professional guidance from a family therapist who has some financial expertise. For more information on helping aging parents manage their money, consult your estate planner or financial advisor. (To help establish an estate plan, see 6 Estate Planning Must-Haves.)