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Will Your Family Ruin Your Retirement?
How To Reduce The Risk Of Aging Parents And Adult Children Consuming Your Retirement Income
By Christy Pedersen
Learn more about Christy by visiting her bio page.
When I meet with clients, I consistently hear this question: Christy, how do I know if I will have enough? My clients may be thinking about a traditional retirement full of travel, hobbies and time with grandchildren - or simply wondering if they can stop working for the money and start working for more deeply fulfilling reasons. It is a real concern.
Most of the families I’m privileged to serve are still building their wealth. They are earning incomes, saving and investing for the future. I can usually help these clients build a retirement plan based on some standard analyses and projections. But these first analyses and projections will always be based upon known factors, thing we can predict today.
Even when these initial projections are positive, some clients still have a nagging suspicion that they may be vulnerable. Through further discussion, two common concerns emerge: how to care for aging parents and adult children. Many clients fear they will not be able to successfully meet their own longer-term financial goals while still honoring their deep commitment to help aging parents and their adult children. I’d like to provide some insights to help you increase the likelihood of retirement success.
My grandfathers’ stories – Alfred and Arthur
Before we look at the risks and mitigation strategies, I’d like to share a little bit of my own story with you. This is the story of Alfred and Arthur, and what motivates and inspires me to serve others as a financial advisor and coach.
Both of my grandfathers were wonderful men who worked hard to provide for their families. While they had tremendous respect for each other, they were very different people. Both of my grandfathers worked for the McDonnell Company at some point in their lives, but in very different positions.
When Alfred was a child, his family lost their business in the great depression. This experience left an indelible impression on him. He grew up filling the holes in his shoes with cardboard inserts. He was deeply motivated to earn a living as quickly as possible. He was frugal with money for the rest of his life.
Alfred loved airplanes and became an airplane mechanic. After WWII, he spent his career at the McDonnell Company as a mechanic and supervisor. He identified with the little guy and was known as a caring and fair boss. He was a dedicated and loyal employee for 30 plus years with the same company and retired with good health benefits and a pension that lasted the remainder of his life. There was some luck involved because he chose a company that was able to fund pension liabilities as long as he needed them. However, Alfred recognized the opportunity, lived up to his end of that deal and saved what he could, just in case.
Arthur was raised in a family business, the Oscar Daniels Company, which remained successful through the depression. There was a history of shipbuilding in the Pedersen family. It can be traced back to Norway and my great, great grandfather who brought that business to Chicago and grew it into a national steel framing company just as the nation’s skyscrapers were born.
As a young man in the summers, Arthur worked on the Field II building of Chicago and the buildings of the 1933 Chicago World’s Fair. Throughout my life, he proudly pointed to the buildings and bridges with the steel framing of The Oscar Daniels Company.
Arthur was heir apparent to take over Oscar Daniels. However, through death and second marriages and bad management, the company was liquidated before he got the chance. As much as this pained him, he ended up doing something every bit as impressive.
Arthur became the chief engineer on the Mercury and Gemini spacecraft. As an executive, he was often in the room with McDonnell himself. Arthur told me stories of regular Saturday work meetings and how even one’s posture sitting at the meeting table was subject to scrutiny.
Despite his tremendous accomplishments, he never fully made peace with the corporate life. When he had the chance to take an early retirement package, he started his own business building solar greenhouses. I think he felt a heavy responsibility to carry on a family business legacy, yet he did not accurately analyze the risk management aspects. Whether he never asked a financial advisor for help or he got bad advice, he put too much of his own lifestyle at risk with his entrepreneurial decisions.
My lessons learned
Alfred and Arthur were highly intelligent men who had character and values that made me feel like I won the family lottery. Neither were financial wizards, but their later years were very different.
Alfred had an income stream that allowed him to maintain his very modest, but comfortable, lifestyle and leave just a bit for his kids when he passed. Arthur’s lifestyle was cut quickly and repeatedly and he became reliant on help from his children for the last couple of decades of his life, eventually moving in with a daughter. While he dreamed of leaving enough money for a family scholarship fund, in the end, only his values were passed on. The money had run out.
The standard retirement formula
There is a standard formula that financial planners use to predict income needs over a 30-year retirement. It’s a pretty straightforward process. We determine your need for annual income during retirement based on your desired lifestyle. We look at how much social security will contribute. We factor in pension benefits. The balance will need to come from your savings and investments withdrawn at a safe rate of about four percent a year.
But there is an X factor that can throw all of our projections out the window. What happens to your retirement plan if you have to support aging parents or adult children? Let’s explore the implications of both and some strategies to mitigate these risks.
Retirement risks from aging parents
It is a difficult thing to describe an aging parent’s need for income as a risk to your retirement. After all, they gave you life and hopefully nurtured you as a child. But as Arthur’s story and national statistics clearly indicate, this is a reality that many families will have to face.
I see two major financial impacts from taking care of an aging parent: healthcare costs and lost income.
Some people are fortunate enough to be healthy until the day they pass away. But most senior citizens require some degree of healthcare. This can range from emotional support and ensuring medications are taken properly to twenty-four-hour care and full-on hospitalization. Those with a family history of dementia are particularly at risk of high healthcare costs, not to mention the diminished financial decision-making capacity.
Many families with parents that exhaust financial resources choose to have the parent move into the home of a child. In numerous instances, a child will need to stop working to care for their aging parent, sometimes for several years. Not only does the child lose income, they lose career momentum which can make it very difficult to get back into the workplace at the same income potential. This is usually not a desired outcome from any standpoint – for the child or the parent.
How to address these risks
There are several strategies you can deploy now to lower the impact of a parent exhausting financial resources. My best friend from childhood recently sent me a template for an “emergency family plan”. I believe she started keeping this record for her own family shortly after 9-11.
This document outlines a common meeting place, has emergency contact information and plan of communication for each family member. It contains a checklist of items to bring (such as a backpack emergency kit with suggested contents) and lists other helpful phone numbers.
When she sent this, I realized the same concept applies to having a plan in place for aging parents and children. I recommend sitting down with your parents as early as possible to outline things such as:
- What will be the signs – agreed upon by everyone – that someone needs to start overseeing the parent’s finances?
- What triggers will indicate the need for in-home help?
- What triggers will indicate the need for assisted living?
- If there are multiple children, do they all have to agree?
- How will the financial requirements of the additional help be met and shared?
- How will the time commitments be met and shared?
To take some of the guilt, emotion and doubt out of the situation, I recommend that you discuss these topics, set expectations and put a plan in place – long before the need is realized. These conversations can also naturally flow into several other topics:
- Who has powers of attorney and what is the scope of those powers?
- Are there any other wishes the parents will make known – or a place they will keep written instructions?
- Will long-term care insurance be acquired using the parent’s retirement income?
These decisions can prevent catastrophic healthcare bills if a parent’s health requires hospitalization. The brainstorming sessions can be quite valuable and yield new ideas and support sources than you may not be aware of today.
- Is there a community center nearby?
- Does your church or other civic group have weekly sessions for the elderly?
- Is there a part or full-time caregiver that you trust among your community of friends?
- Is there a neighbor who can be a non-intrusive watchful eye?
Write these ideas on the emergency plan with contact information. If there is a fall or other medical emergency, having so much written down and thought through ahead of time will help.
The most important thing is to have a plan and understand the risks. If you can understand the potential financial impact coming, you can likely take steps to reduce it.
Retirement risks from adult children
The other major unknown that can drain your retirement resources is what happens with your adult children. In days gone by, parents would pay for college and then children would become financially independent within a year or so, often working for the same company for decades.
These days, the careers of young people look more like roller coasters than a stable journey. Many young professionals resort to contract work and some even prefer this to standard employment. This not only means they are covering their own health insurance and retirement, it also means they have peaks and valleys in their income, making budgeting much more difficult.
Some years they may earn well above their lifestyle needs for income. Other years they may earn well below their needs. In those valley periods, affluent parents often feel responsible to support their children’s lifestyles so the children do not become discouraged.
The financial impact to parents is that money that should be going to their retirement accounts is instead gifted to children. Parents not only lose the tax deferred benefits, they also diminish their savings at a time close to retirement.
How to address these risks
It is a hard thing to say no to a child, especially a hard-working child who is on their way up in life. You certainly want them to be encouraged and continue to work hard and save for the future. I have come to believe that the best gift a parent can give their child is financial planning.
This gift teaches a child how to live within their means, no matter how much income they earn, and save for the future. This gift also emphasizes the goal of complete financial independence.
When a child is completely financially independent from their parents, they take flight. They gain a sense of self-confidence that propels them forward in other areas of their life as well, like relationships and goal setting for careers.
If you would like to learn more about how we provide financial planning for young professionals, please reach out to me. This gift could very well protect your retirement.
How can I help?
My grandfathers, Alfred and Arthur, both had admirable and honorable goals for their wealth and their families. One saw his dreams come true and one did not. Financial planning, along with financial discipline, can make all the difference. If there is anything I can do to help you mitigate risks from the unknowns in your family life, let’s have a conversation.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.