“Late in Life” Planning Challenges

What happens when you run out of money before you run out of breath?

by Herb Daroff, JD, CFP

Mr. Daroff is a contributing editor for LIFE&Health Advisor. He is affiliated with Baystate Financial Planning, Boston. Connect with him by e-mail: [email protected]

Shakespeare describes the seven ages of man:
1. Infancy: helpless needing the aide of parents, comforted and protected
2. At school: lacks confidence
3. Lover: stammers when expressing himself
4. Soldier or, today, employee: focus is on making his reputation, may take unwarranted risks
5. Justice: thinks he has wisdom through experience, acquires possessions
6. Old Age: begins to feel impaired both physically and mentally
7. Second childishness: dependent on the help of others (their children?)

We all start on four appendages, crawling. We move up to a walker and then finally learn to stand on our own two feet. But, then later in life, we need to use three (two legs and a cane) and finally back to four (two legs and a walker).

So, what do our adult age children do when they lack the financial resources to be independent? They look to move in with their parents. They look for roommates. They look to share expenses.
What should parents do when they lack the resources to be financially, or physically, or mentally independent? They may need to move in with their children or grandchildren. They may need to find roommates. They look to share expenses.

Parents find it hard to send their children to the government for assistance. But, children seem ok with sending their parents there. That’s Social Security for income, Medicare (and the Affordable Care Act) for healthcare, and the Medicaid* system. Income may also be provided by the Welfare system if they have very few assets left. Same for custodial care that may be provided by MassHealth or other State run (but federally funded) program.
If you don’t want to rely on the government, or your children, then you need to plan now for later in life challenges.

Step #1: TAKE A FISCAL PHYSICAL

What do you own? What do you owe? What insurance coverage do you have in place? How much do you earn? How much do you spend? A financial planner can’t do financial planning without financial statements (i.e., reviewing a balance sheet and an income statement).

Step #2: PLAN

Start with what you spend. Are those expenses covering things you need, or things you want? How often do you eat out? How much do you spend on double mocha lattes every day? Are any of your expenses tax deductible? Can any of your expenses be paid by family members in lower tax brackets?

This is a new opportunity since 2010 when the gift and estate exemptions became the same. If you derive income from businesses (e.g., S-Corp reported on K-1) or real estate (e.g., LLC also reported on K-1 or Form 1040 Schedule C income), you could gift that income producing asset to a trust designed to shift income taxes to the beneficiaries (not the grantor, and certainly not the trust). So, for example, if you are paying for a child’s college expenses of say $30,000 and it takes you $50,000 pre-tax, you may be able to shift say $40,000 of income from K-1 (for example) to a family member (i.e., parent, sibling, child) in a lower tax bracket. They net the same $30,000 and they pay the tuition. Remember, direct payments for education are not limited by the $14,000 annual gift exclusions. It’s amazing how much you can save just from a review of the family tree.

In addition, how much do you owe? At what interest rate? For what duration? Are you actively paying off low interest debt when those dollars could work harder for you otherwise? Can you find additional dollars to set aside for later in life?

Step #3: REVIEW INSURANCE COVERAGE

Look at all of your insurance (e.g., life, health, dental, vision care, disability, long term care, auto and home, etc.). Is the coverage adequate or excessive? Are you paying the right amount for the right coverage? Can you afford to take on higher deductibles?

Step #4: EXAMINE INVESTMENT PERFORMANCE

Parents find it hard to send their children to the government for assistance. But, children seem ok with sending their parents there

Is your cash and other investments (qualified and taxable) earning as much as they can consistent with your risk tolerance? Money in banks today is not working very hard, but can you afford to take greater risk? Can you get higher return with the same or even lower risk? Have you taken advantage of the lifetime income benefits from variable annuities to increase your reliable income in retirement?

With today’s low interest rates, too many people are paying down low interest rate debt and too many people are locking in low interest rates on fixed annuities. That’s not to say that doing so is right or wrong for everyone. Today is a good time to borrow (if you can afford it) and a bad time to lock in fixed income.

Step #5: EVALUATE WHERE YOU LIVE

My wife and I just down-sized our home. We did not down-grade! We sold the house that was big enough to raise our three children and bought a condo in an over-55 community. No more shoveling snow, mowing grass, or raking leaves for me. Our taxes and condo fees are now substantially less than what we were paying for taxes, landscaping, snow removal, trash removal, etc. We now have a much lower mortgage debt and all of the children’s school loans are paid off. We kept the mortgage debt in place because we locked in 3%. We had a home equity line of credit (HELOC) on the former house, which we used to pay for the new condo. With that paid off, we are applying for a new HELOC on the new condo, just in case.

Step #6: RECONSIDER WEALTH TRANSFER

My favorite bumper sticker reads, “If you don’t fly first class, be assured that your grandchildren will.” Having saved for a rainy day, you have to recognize that it is now raining. Do you sacrifice standard of living in order to leave a financial legacy for your children? Can your children now afford to be making gifts to you? Can they take you on vacation with them? Or, do you sacrifice standard of living because you did not set aside enough during your working years? Were your investment decisions too aggressive and you lost value? Were they too conservative and your lost purchasing power? Like Goldilocks, your investments must be “just right” for you and your level of risk.

Step #7: RECONSIDER RETIREMENT

Should you continue working at your current job longer, if you can? Should you look for other gainful employment after retiring from your current position? Should you take on a second job before retirement?

I attended a retirement planning seminar in early 2000. The presenter started by asking everyone to take out a sheet of paper and writing down what you would do after retirement. My answer has always been that if I ever retire, I would teach. About five minutes into the exercise, the presenter asked the group, “What are you waiting for?” I began teaching at Bentley that September and continue to do so. I will also be teaching at Assumption starting this summer. I use that income to fund my vacations. But, I teach because I love it. The students keep me fresh and sharp.

The key to financial planning is reviewing financial statements (balance sheet and income statement) and examining your own family tree. You may be able to find the extra cash flow you need in your own backyard.

*http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Medicaid-Benefits.html
States establish and administer their own Medicaid programs and determine the type, amount, duration, and scope of services within broad federal guidelines. States are required to cover certain “mandatory benefits,” and can choose to provide other “optional benefits” through the Medicaid program.

*This includes services furnished in a religious nonmedical health care institution, emergency hospital services by a non-Medicare certified hospital, and critical access hospital (CAH).