There has been increased press about a new type of annuity, longevity insurance. It is designed to pay benefits starting at a later age, like age 85. Thus, if you plan for your assets to last for a normal retirement (20 years or so), the longevity benefits can kick in to pay benefits in case you live longer than expected. So, is this a good idea or not?

The idea sounds good because it reduces one of the larger risks in retirement, mortality (expected lifetime). Thus, if you can find a cheap insurance to cover an additional 10 to 20 years in retirement (from 85 to 95 or 105), it, in theory, could help reduce the money you need to save for retirement.

In a BusinessWeek article, it states that a 65 year old can invest $250,000 and expect to receive $210,000 per year at age 85. So, if you can live on $50,000, then this amount would be significantly less (maybe $60,000 to $70,000), right? Before you go out and jump on this opportunity, there are a few things to consider.

1) Inflation – Even with 3.5% inflation, the amount you need at 65 will more than double by the age 85; $50,000 at age 65 will be equivalent to $100,000 in 20 years (and more the longer you live). If you get a longevity annuity indexed for inflation, expect to pay at least double what you would pay without inflation protection.

2) Married – If you are married, the cost of a policy paying benefits as long as either one of you is alive past 85 could almost double (if not double) the price policy again. What good is a policy if it only pays a benefit if you are alive and not your spouse? Thus, a hypothetical $60,000 policy (for $50,000 of benefits) could easily be worth $200,000+ if married and indexed for inflation (note, this is very dependent on your spouse’s age and time when the policy is purchased).

Yet, the benefit of having a policy that covers benefits after age 85 is a lot cheaper than buying a $50,000 annuity that starts immediately at age 65 which can easily cost $1 million (indexed for inflation and payable as long as either spouse is alive).

The key for longevity insurance is that it is suppose to lower the amount you need to save for retirement. If you are factoring in a 30+ year retirement (age 65 to age 95+), you will need to save $1 million or more to receive ($50,000 a year). Yet, to save for a 20 year retirement (age 65 to 85), the amount is reduced.

20-year annuity (6% investment return and 3% inflation) = 15.2 times the amount you need (e.g. $760,000 for $50,000)

30-year annuity (6% investment return and 3% inflation) = 20.1 times the amount you need (e.g. $1,000,000 for $50,000)

You will need to save an additional $240,000 by age 65 for the additional 10 years of retirement and more if you live past 95 where the longevity insurance can guarantee this for life. The key is if it is worth the price and that depends on how much the insurance policy will cost (remember the $60,000 policy may be $200,000 or more once inflation and marital status is reflected).

So, maybe the price of the policy is not as good as we once thought. It is still good if you live past age 95, yet not so good if you die before age 85 and thus receive nothing. Yet, the difference between a

Yet, before you make a decision, there are a few other things to consider:

1) Expense Load – With all insurance, there is a commission paid to the agent who sells the policy and to the insurance company for profit and administrative expenses. Be cautious of expenses called longevity benefit expenses. In one prospectus, there was a 1% charge of the premium each year until the longevity benefits commenced. Thus, if you buy the policy at age 55 and start the benefit at age 85, 30% of the premium could go towards paying this expense, in additiona to the standard mortality and administrative expense (which was an additional 1.35% per the policy that I saw). So, it seems there is an expense for the “benefit” of delaying the start of the annuity which can wipe out part if not all of the benefit of a longevity insurance policy.

2) Death benefit – Some policies come with a rider where you can get your initial investment back, called a cash refund. However, in getting the rider, you are reducing your monthly benefit to pay for this death benefit. I never like these cash refund because the $200,000 you invest now is worth a lot more than the $200,000 your heirs get back when you die in the future. So, is it worth it? If giving money to your heirs is important you should reconsider your financial plan because this cash refund rider is an ineffective way to provide an inheritance because too much of it goes to the insurance company.

3) Expenses later in life – Some people say a lower cost option is to buy an annuity for the fixed living expenses (needs) and use savings for your wants (travel, eating out, etc.). Thus, you would not need to buy insurance for all your expenses, just the necessities (to reduce costs). However, as you age, your fixed expenses grow (e.g., prescription drugs and home health care costs) while other expenses decline (e.g., vacations). Thus, what fixed expenses do you cover, the expenses you have now or the expenses you may have later? You may find that most of your expenses later in life are fixed.

In addition, if you have long-term care insurance, longevity insurance may add some overlap that you end up paying twice. Do you really need an annuity payment if you are in a nursing home that is covered for? It is not like you are going on vacations or eating out, if you can not even feed yourself or go to the bathroom without assistance that the long-term care facility is providing.

I bring this all up to put some questions in people’s mind before rushing out to buy a longevity policy. At first, I thought this was a brilliant idea, which it may still be under certain situations that you should review with an independent financial adviser (one not selling you the policy). However, I started to have second thoughts about the cost of the insurance when I saw a policy illustration showing the benefits of longevity insurance. In the example, a $100,000 policy to a 40 year old showed a $4,960 benefit at age 85 that would accumulate to $892,800 if the policy holder lives to age 100. However, $100,000 invested at 6% from age 40 to age 85, would grow to $1,375,000 at age 85, which can covers 23 years of a $4,960 monthly benefit even if it is not invested after age 85. Where did the extra $½ million go ($1,375,000 - $892,800)? Note, the insurance policy may have other aspects to it that the illustration is not reflecting (e.g., having the ability to invest in more aggressive assets which could increase the monthly annuity significantly, dependent on market performance).

Before considering or not considering a longevity insurance policy, please do your own review (or have an independent financial planner perform one). This analysis is based on information posted on the web provided by a major insurance carrier which can change over time as more competition hopefully reduces some of the expenses that are now being charged. The purpose of this article is to raise questions you may want to consider and should not be construed that all longevity policies are similar to the one I used for parts of this analysis.

In looking at online retirement calculators, there are a few things that stuck out to me on how we can mistakenly under estimate our retirement savings without realizing it. Now, retirement estimates (especially at younger ages) is just a rough estimate and will change drastically over time. However, to get a better handle on what it will take to retire, it is important to understand what goes into the calculations. Thus, I have chosen a few of the assumptions that can have a dramatic impact on how much we will need in retirement.

Investment Returns – Pre-retirement

I have always suggested taking a conservative approach in estimating future returns. At first, this was because I would rather save a little bit more than needed rather than fall a little short, especially if I had the flexibility to put the little extra away now. Thus, when some calculators start out with a 10% return before retirement, I would knock this down to 8% without giving it much thought.

In looking at the calculations further, I am now even more convinced that using a lower estimated return in a necessity rather than just out of being cautious. Even calculators that ask you how your portfolio is allocated (stock/bond mix) should be adjusted to use a lower percentage of stock.

Why is this? How you are invested today is not how you are going to be invested when you get to retirement. If you are invested in 80% stock and 20% bonds now, you may expect to receive a 9% return (assuming 10% return from stocks and 5.5% return on bonds). As you get closer to retirement, your risk tolerance is probably going to decrease. Thus, your allocation may get closer to 50% stocks and 50% bonds (probably even less in stock with some being allocated to cash or cash equivalents). Assuming 50/50 stock/bond allocation (for simplicity), the assumed rate of return is 7.75%. The difference between 9% and 7.75% may not sound very large, yet it adds up over time (especially if you are younger).

For a 35 year old who starts to invest today for retirement at 65, the difference in returns can decease the projected retirement balance by 13%, assuming a portfolio in stocks decreases steadily (assuming % allocated to stock in this calculation is 120 – age) instead of having a constant portfolio.

This is similar to the pre-retirement allocation. I am always a little surprised at how some calculators default to an 8 percent for its post-retirement investment rate of return. Because a bigger portion of retiree’s portfolio is allocated to cash or cash equivalents (e.g., high yield saving accounts and CDs), it is difficult to get to an 8% return, unless a large portion of the remaining portfolio is allocated to stocks. Even assuming a 30% stock, 50% bond and 20% cash portfolio (with cash assumed to earn 4%), the assumed rate of return for the portfolio is 6.5%.

Having 20% allocated to cash may sound too high, yet, if there retiree is older (age 75), it may only represent the next few years of expenses. And, even if you have less allocated to cash (30% stock, 60% bond and 10% cash portfolio), the assumed rate of return is still only 7.0%.

Your future salary has a large effect on how much you can save and how much you can spend in the future (income – taxes – savings = expenses). The projected salary increases is technically based on assumed inflation rate + assumed promotion increases + assumed productivity and merit raises. However, when we sit down with these calculators, we may only think about our recent raises. For some, they may feel lucky to get inflation + 0.5%. So if inflation is 3.0%, the project salary increases would be 3.5%, in this situation. For others, they may be grateful for 3% raises.

Thus, when some people do their salary estimate, they may assume a salary increase close to inflation (3% or 3.5%). However, have you really maxed out your salary? For some, they may answer this with a definitive yes (especially if the thoughts of a future promotion are bleak). For others (especially younger employees), this may not be the case. What we forget in some cases that recent salary increases may not be as great because due to other larger raises (maybe 10 percent or more) coming with either promotions or job changes where with subsequent salary increases being smaller to compensate (get the employee’s salary back to average). Thus, if an employee receives a major raise of 10% once every 10 years (then relatively small raises after that), this is equivalent to a 1% increase every year. Thus, the meager 3.5% salary increase assumption is really closer to 4.5%.

Why does this matter? If you are basing your retirement expenses based on your spending today (assuming future salary increases = inflation or close to it), you can be underestimating your retirement expenses. If you receive a $5,000 raise for a major promotion or job switch, we may decide to save 20% of this ($1,000 a year), be taxed on 35% ($1,750 a year) and spend the rest, $2,250. If you assume your salary will stay constant to retirement, you will not recognize that your lifestyle has increased by $2,250 and thus not save for it.

Thus, even if you have not received a decent raise recently, a salary scale at least 1% to 2% over inflation should be considered.

In assuming retirement expenses, it is easy to overlook what will happen as we get older. In our 40s and 50s, when we have children living at home, it may be a time where we diligently cut expenses. My parents watched the number of times that we ate out because they could not afford the cost of taking out a family of 6, every week. However, as we (the children) grew up and left home, my parents had some of their income freed up and my mom went back to work. Thus, they started to eat out more because my mom hates to cook just for two and they could now afford dinner out on a more frequent basis. Others may take more vacations especially if they already have a healthy retirement fund or start bring in help to do chores (professional cleaners and lawn services) because they have a hard time keeping up with everything.

So, if you are estimating that you can live on 50% of your income due to your savings habits now especially with children, be cautious of spending creep as the drive to cut expenses diminishes as your budget situation is not quite as tight. This is important because how we spend in the 10 years before retirement is more important than how we spend now. If we get use to an upscale lifestyle after children leave the house, it is harder to cut back in retirement.

By now, many already know that the average life expectancy is around 85 (slightly less for males). Thus, some calculators use 85 as the average age of death. However, as many also know, there is an increasing chance that retirees can live to 95 or 100. The odds are even better if married that retirement assets may need to last until at least age 95. For a married couple (both age 65), there is a 10% - 25% chance (depending on which mortality tables are used) that at least one of them will live to age 95. Thus, assuming that retirement savings only need to only last to 85 is a large gamble in my opinion because there may not be much savings left after 85 to live on other than Social Security.

Even though I did mention some assumptions where we can be underestimating our retirement income, there are a few other things that we may not be factoring in that can increase our retirement savings. In particular, older workers whose children leave home can shift a greater percentage of their income (that was used to raise children) shifted into retirement savings. Thus, if you are behind, you can look into taking advantage of additional catch-up contributions. This also helps reduce the expense creep (upgraded lifestyle) that some parents can get use to when the children leave the house.

In addition, some retirement calculators do not recognize part-time jobs that retirees may have that provide a little additional income in retirement that makes their retirement savings last longer. There is always a way to catch-up. It is just important to recognize what is reflected in the retirement calculation assumptions and what is not so you can adjust your retirement plans accordingly.

Ode to the day that we can all sit back and have a drink in one hand overlooking the ocean on our first day of retirement. Just as we start thinking that we could get comfortable with this lifestyle, we think “what happens if I outlive our retirement money?” Luckily for us, we had the foresight to plan ahead. With all the retirement calculators out there, we think that this is an easy process. But, then a fear embraces us, as we think did we use the right one?

I was going to do an article on the different results that I got from all the retirement calculators and advice out there. However, as I was looking up the results on each site, things got confusing. Each one told me a different amount to save (some answers close to each other and others not). Then Kiplinger just came out with their analysis of 5 different online retirement calculators (it was sitting in my inbox until today). So why beat a dead horse?

Over the years, I have heard a lot of different advice on what to save for retirement that it became confusing even for me (an actuary who deals with retirement plans all the time). We have heard different strategies on how much to save, including:

• The standard answer, save 10% (very popular until about 2-3 years ago)

• The updated answer to the standard 10% advice, per Liz Weston at MSN, the article says if you save starting in your early 30’s, you need 10% for basics, 15% for comfort and 20% for a shot at early retirement

• The pessimistic answer, save as much as you can

• World is going to be over answer, live for today because tomorrow may never come

• More precise actuarial answer, per AON/Georgia State study in 2004, says that if an employee starts saving at age 35, we need to save 6.4% if we are earning $50,000, 9.9% if we earn $90,000 and 11.4% if we earn $90,000 and are female

So why is it that we can not get a clear answer? As the saying goes, there is no certainty in life except death and taxes. With retirement there are many things that are uncertain:

• Retirement age
• Life expectancy
• Social security benefits
• Return on investments
• Inflation (both general and medical inflation)
• Expenses (do we need 70%, 80% or 90% of their pre-retirement income)
• Marital status

With many different factors it is easy to see why everyone wants a standard answer like 10% or 15%.

I never like these simple rule of thumb approaches because it may work in some cases, but not for everyone (actually probably not for many). For example, United State’s Social Security benefits are projected to replace 30% or so of an average retiree’s final salary. However, if a retired couple is married where the one spouse worked and the other did not, the 30% replacement ratio may be close to 45%.

Thus, if someone was targeting to replace 70% of their pre-retirement income, they may need to save 40% if single (or dual wage earner family). Or, if one spouse stayed at home, they may need to save significantly less than the other couple due to only needing to replace 25% of their income (instead of 40%). Now, which scenario is the 10% to 15% of savings based on?

In addition, all rule of thumb examples need to make an assumption on income. A retiree’s income has another significant effect on their Social Security benefit. Someone who is earning a 6 figure income may only see 10% to 20% (or less) of his pre-retirement income replaced by his Social Security benefit. Thus, instead of the retiree’s 401(k) needing to replace 40% or so of his income based on rule of thumb estimate (which assumes a significant Social Security benefit), a higher paid retiree may need to replace 50% to 70% of his income (an additional 10% to 30% of his pre-retirement income).

Then, what if Social Security goes bankrupt? This is enough to make your head spin.

Note, Social Security will not go bankrupt in the sense it will stop paying all benefits. Social Security will still collect FICA taxes to pay most benefits. However, the amount of total benefits paid may only be 75% of what was originally projected to be paid (if nothing is done before then). The question is will some retirees see their benefits drop by more than 25% in order to help those who need Social Security the most (e.g., a poverty or income test).

The key goal for retirement planning is to become comfortable with the uncertainty. The easiest way to do this is a two prong approach:

• Know that you can handle what ever comes your way even if it means working in retirement or delaying retirement, the key is flexibility (such as not locking yourself into too many fixed expenses before retirement)

• Understand what the uncertainty is; in other words, run different calculation using different assumption

The best way to understand the possibilities is to run different assumptions using different online retirement calculators. I suggest using more than one calculator because they will each give you a different answer. Note, even when Kiplinger ran their sample person (a 37 year old) through 5 different calculators, the first year retirement income differed anywhere from receiving $75,000 to $250,000.

You may wonder, why even do retirement planning if there is going to be such a big range of results? Do not fear, the difference is due to all the different assumptions (investment return, inflation, etc.). For someone saving $1,000 a year for 30 years, the difference in the accumulated savings in 30 years is $113,000 at 8% assumption versus 164,000 at 10% assumption (45% increase). As you get closer to retirement, some of the uncertainty becomes more certain, as you have fewer years to project. However, there will always be some level of uncertainty because it is life (unpredictable).

By running some scenarios, you will see a reasonable range to target where you are aware how different things can affect your plans (like investment returns being less than expected). This way you know how your plans need to be adjusted based on how actual events unfold.

I know many would prefer just to be advised to contribute a specific % to their 401(k) and forget about it. However, I believe that simplifying retirement planning by using 10% or 15% is actually making matters worse for us in the long term. Recently, my local newspaper had an article on how debt is currently drowning retirees. It got me to thinking if these retirees are getting into trouble by using a rule of thumb estimates instead of really understanding the risks that they will encounter in retirement.

For example, a 50 year old couple may be able to afford a new home with a 30-year mortgage when they buy the home (and get approved by a bank). Yet, will they be able to afford the payments if they need to cut their expenses by 10% when they retiree because they were forced to retire early? Did they really understand how a small deviation in their plans could result in a significant financial issue?

So there is nothing certain in retirement. Best thing to do is to educate yourself on the risks and be better prepared to handle anything that comes your way. To help with this, I will have a series of articles on how some of these calculators make their estimates and compare the results to other estimates (one of which may be closer to your situation).

P.S. – Here is a quick summary of some of the results I got from internet retirement calculators. For it, I used a 35 year old with no retirement savings who wonders how much he needs to save (note, I do not endorse anyone of these calculators and do not guarantee the results):

Vanguard – 15%

Yahoo – 12.9% (It assumes 8% post-retirement investment return which seems high yet the default assumptions do not reflect any Social Security benefits and assumes the retiree lives 20 years)

CNN Money – if he saves 15%, he has 100% chance of reaching goal (yet the calculator default assumes retiree only lives to 85) if he saves 6%, he has 84% chance of reaching goal

MSN Money – if he saves 10%, money runs out at 102 (if no Social Security, money runs out at 81), if he saves 6%, money runs out at 83

AOL – if he saves 15%, money will run out just before age 87 (assuming their baseline expenses in retirement)

CCH Toolkit– If he saves 15%, money will run out at 88 without Social Security benefits and age 92 if he saves 10% with Social Security benefits (yet calculator estimates a 10% pre-retirement investment return and 8% post-retirement which seems a high yet a 90% pre-retirement income replacement ratio)

It seems that retirement savings is getting more complicated. Some reports are saying we are not saving enough while other reports are saying that we are saving too much. So who do you believe? The answer is that neither of these reports has anything to do with your situation. These reports are on the macro level, looking at the country in general. To understand your situation, you need to look at your long-term financial picture. In particular, you need to see how your big ticket items, like housing, medical, savings, children, taxes, etc., will affect your saving for and your spending in retirement.

To understand how much you need to save in retirement, many people point to the income replacement ratio that you should target for retirement. The general rule of thumb is that a retiree will need to replace 70% of his income in retirement (recently this has been bumped by some advisors up to 80%). Yet, this number is based on looking at the spending habits of current retirees. It has little to do with what you may need in your retirement based on your spending habits.

Many look at the 70% to 80% and justify it by starting with 100% of income and making adjustments in spending for the typical retiree. It assumes the average retiree will save some money in taxes, will not need to save for retirement anymore and will need to spend additional money on medical care. It also assumes retirees will save some money on living accommodations in retirement. However, because some retirees rent, some retirees are paying off their mortgage and some retirees are paying for assisted living, the savings is usually not an all or nothing adjustment (just an average of the typical retiree). So for someone retirees who paid off their mortgage and have long-term care insurance, they may need to significantly less money for shelter. The key is to plan your large expenditures as you get closer to retirement to see what your target number is, for example:

In this example, the worker is planning on using his current expenditures for his children and using it towards his retirement savings as they leave home. He is also planning on paying off his mortgage before retiring. Thus, instead of needing to replace 80% of his income, he may only need to replace 65%. This is significant reduction, especially if Social Security was going to replace 35% of his income, because he may only need to replace 30% of his income instead of 55% (nearly ½ of what he may have planned on). However, he should also be careful and additional money for assisted living since he is assuming nothing for his housing in retirement.

Yet, as you see, the actual replacement percentage is very dependent on the retiree’s situation. If a retiree’s mortgage has not been paid off before retirement (for example, he bought a more expensive place in Florida to retire to), the 65% needed for retirement may be closer to 85%. In addition, if the retiree had not been saving a lot of his retirement due to having a good company pension plan, the income he may need to replace in retirement could increase from 85% to 90% or 100%.

Some things to consider in figuring out your replacement ratio:

Retirement Savings – How much are you currently savings for retirement? If you do not have a company pension plan, you may be saving 15% to 20% already which will significantly reduce the amount of your income you need to replace in retirement. If you have a great company pension plan or wise investing early in your career (which decreased the need to save later in your career,) you may not have been saving that much, the closer you get to retirement. If you are spending the money instead of saving it, you will need a higher amount of your income replaced in retirement.

Taxes – If you plan to move to a state with lower or no income taxes (like Florida or Nevada), you will be able to save some money (yet compare the state’s sales taxes to see if this will be higher). In addition, if you saved more money in post-tax investments like a Roth IRA or regular investments (e.g., non-IRA/401(k) accounts), then you have already probably been taxed on most of this income, thus you will save some money on Federal taxes.

Housing – If you have paid off your mortgage before retirement, you may need less money in retirement (unless you have already used this savings for other purposes like more extravagant vacations). Do not forget, even if you do not have a mortgage in retirement, you may have costs for assisted living and/or nursing home care later in retirement that should be factored in.

Note, some would say needing less money for retirement by pay off your mortgage is an important step to do. Yet, paying off your mortgage will lower the amount you need to save for retirement but will also lower the amount that you can save for retirement (which basically cancels each other out). For example, if you had a decision whether to invest $20,000 for retirement or use the $20,000 to pay off the mortgage, the decision should be determined on which investment will provide a better return for your risk tolerance (see Should I Have a Mortgage? ). If it is in investing, you can use the money you invested to pay off the mortgage during in retirement. If it is in paying off the home, you will have saved less for retirement than you otherwise would have yet you will also need less for retirement by paying off your house early.

Vacations & Hobbies – If you plan on using your extra time in retirement to take longer and more frequent vacations and to play more golf (or other hobbies), you may need more money for this. These expenses will curtail as you get older, so some people would not think this is a big deal to reflect in your planning (reason to use a lower target replacement ratio). Yet you never know how long you will remain healthy and active. I have a grandmother who kept on traveling into her 80s. Also, you may find yourself traveling less as you get older in retirement, yet the types of trips may be more expensive as you choose tours that are more inclusive than going it on your own. In addition, as your vacation and hobby expenses decrease, some other expenses (like medical and in-home nursing care) can increase. Thus, those who say your first 5 years of retirement are more expensive due to vacation plans, they can be right for those whose health quickly deteriorates without a corresponding increase in medical expenses (until later). However, if you remain healthy, you could continue to keep active with you vacation and hobbies if you planned ahead and saved.

Working expenses – If you had some expenses to keep the corporate image or to compensate for long hours at work, like dry cleaning, clothing (buying suits) or eating out (due to time limitations), cutting these expenses in retirement can save you some money. However for some retirees like my parents, they actually increased their eating out costs in the years leading up to retirement and in retirement because there were no children at home to feed anymore (to expensive to take a family of 6 out to eat) and thus cooking was viewed as more of a choir that they preferred not do than a requirement. So some costs may decrease (dry cleaning and gas) while other costs may increase (eating out) depending on what you want to do.

Handyman expenses – As my parents aged, the cost of expenses of maintaining their home increased. As the home aged, it needed more upkeep (as things broke down more frequently). Some of the repairs became more difficult for my parents to do by themselves (they did not have the same energy as they use to). And, since none of us children lived near by, they had to hire more help to maintain their house for things such as mowing the yard each week and cleaning the outside windows because my dad stated to avoid tall ladders.

In the end, we tend to find a way to live on what we have whether it is a little or a lot. Just like some people can live on 50% of their income while others live on 110% of their income via borrowing, a retiree can find ways to adjust how he lives on what he can afford. However, to live the life you want and to make retirement easier, you should map out some of the big expenses that you are planning on (like money needed for the mortgage and vacations) and see what you need to put away now to have the retirement you want. In retirement, you can make adjustments depending on how much you saved (e.g., adjust the number of vacations you take or the number of times you go out to eat). Yet, have a target in mind, so that these adjustments are more minor in nature than a major change because your actual savings was too far off from what should have been targeted.

The other day, I was asked about how deal with elderly parents who are financially irresponsible and in serious debt. I have also heard from other readers whose parents expect them to be responsible for them financially as they age. With an aging population, there have been a lot of discussions on the basic financial decisions that need to be made. There are has also been articles on how to have a financial discussion with aging parents, such as Talking with Aging Parents about Finances. However, what do you do when the standard financial discussion goes nowhere because parents refuse to listen?

The key is to understand the minefield that you are traveling down. As a child, you feel some sort of responsibility to take care of your parents for all they have done raising you. Even if you blame them for a bad childhood, you would feel some sort of guilt if you see them sitting on a street corner eating beans. Your parents want their independence and self-worth. Being told how to deal with their finances from a child (in their eyes) can seem like a slap in their face.

Many would focus on their parents to solve the problem; however the best place to start from the perspective of the adult child.

(1) Deal with fear

As the adult child, there is a lot of fear of what may happen with your parents and what role you will have in helping out. Because you do not understand the financial commitment you may be making, you feel fear when you see your parents making what may appear to be stupid financial mistakes. However, unless you have seen your parent’s finances and understand their plan to afford retirement, you may not know the whole story. The key to this situation is to make sure you understand all the facts instead of making assumptions. You may have heard about their debt which brings up fear in you. The fear is about worrying what may happen to your parents and how much you need to help out when the time comes. Knowing the nature of your financial responsibilities is a reason why planning your parent’s retirement is so important.

Note, upon their death, if there are more debts than assets in their estate, their debts will die with your parents. If there are more assets than debts, the inheritance will be paid out after the debts are settled. So do not worry as much about their debts rather their cost of living less Social Security payments.

Also note, with Social Security and other programs (e.g., heating assistance, Medicaid, etc.), the poverty rate for the elderly is relatively low. So, if your parents need assistance, understand all the programs available in your area. You can check with AARP to learn more about such programs.

(2) Deal with the guilt

As an adult child, you may feel guilty if you disappoint your parents and are not able to help them. You may want to help out now before things get too bad, yet sometimes you parents will not want our help until it is too late. This guilt will drive you to try to fix the problem which is the wrong attitude to have.

(3) Give up the need to fix

If you go to your parents trying to fix them, the situation will go from bad to worse. Your trying to fix the situation can drive a wedge between you and your parents. Parents do not want to be fixed unless they ask for help. It is best to understand your fears and guilt and express your worries about their finances to your parents without the need to fix them. Needing to fix them will only lead to frustration if they reject your offers. Persistence is the name of the game here. Have ordinary conversations with your parents to build up trust and to let them start seeing how their finances can adversely affect them and your siblings long-term.

(4) Understand your parents

Parents can be balking at accepting help for a variety of reasons:
a) Prefer to ignore their problem than address the shame and guilt they feel about their own debt
b) Do not feel comfortable talking about their finances with their children
c) Feel that their situation is hopeless and just want to hang on as long as possible
d) Want to remain independent in making their own decisions

By figuring out why your parents are resisting your help makes it easier in finding a solution that you can suggest to get help for your parents. For example, if your parents are not comfortable talking about their finances with their child, then suggest having them see a financial advisor (you can even give them a free introductory session with an advisor).

To better understand what their parents are going through, you should consider that they:

(5) Are set in their ways

After 60+ years, parents tend to be set in their ways and have little incentive to change. As they say, it is hard to teach an old dog, new tricks.

(6) May see the situation differently

Trying to convince a parent to take the umbrella for a walk around the block if they see blue skies is hard when you see a stormy sky. You need to see the same situation to get to an agreement. The parent may have cataracts that blur their visions; however they see what they see and it is hard to convince them otherwise. So be patient with them because until they see what you see, little will be resolved. It may not be as hopeless as it seems. The key is to have conversations early on.

So what do you do?

(7) Get on the same page

As parents age, it is important that someone (especially their executor and person designated by their power of attorney) know their complete financial situation. If the parents have an accident, a sibling may need to step in with the power of attorney immediately. Thus, sit down for a conversation around setting up these forms with your parents. Then use it as an opening to make sure everyone is seeing the same budget and net worth statement so further conversations about retirement planning can be about facts instead of assumptions.

(8) Understand responsibilities

Find out what your parents are expecting out of their children as they age. Some parents may expect that their children will step in to help out because that is how their generation did things. Younger generations may have a different understanding, thus it is important to sit down and discuss these expectations. It may be important for the parents to understand that their child’s finances can not support their unlimited needs in their old age. Parents may want their child to step up thinking that they may need only $2,000 a year in support when the number can be closer to $20,000. If your parents do expect support, you can ask them how much support, when and for how long. Then ask if someone else has looked at their plan to verify that this is a reasonable estimate.

(9) Express feelings of the situation

Now that the numbers are out on the table, each party should express how they feel about the situation. You can express your fears of what may or may not happen. This may help convince them to explain their financial situation further to help ease your fears.

(10) Make boundaries known

You have a responsibility to step up and explain what you are willing to do and not willing to do with your parents. I have seen situation where children loan their parents money and then get angry when their parents did not pay them back. Part of this is the child did something that they were not willing to do knowing their parents would not pay them back. However, they felt guilt and gave in hoping for the best. Know your limits and make sure that your position is clear so that you can work on a solution instead of getting angry at them when they take advantage of you.

There are different methods for these conversations

(a) Financial advisor

To get the numbers on the table a financial advisor can be a valuable resource. Look for one that has experience in elderly issues that can provide an education on what Medicare, Medicaid and other assistance programs will and will not cover.

(b) Family meeting

A friend of mine recommended this strategy once every quarter. There are family counselors that can act as mediator so that cooler head prevail.

(c) Intervention

In my opinion, interventions are usually for life or death situations such as with drug or alcohol abuse. Money abuse usually does not fall into this situation. Your parent’s financial problem probably took years to create and can wait a few months to build up to a solution. It is usually better to bring up these issues in a family meeting because an intervention can leave parents resentful. Your parents may need to move in at some point with one of the children. If they harbor resentments from how an intervention was handled, this may create an even more volatile situation.

Keys to Success

(1) Understanding

Recognizing each person’s point of view and moving towards a comprise takes time and is the reason for a family meeting. These issues are probably not going to be fixed in one meeting, so do not expect too much at first. Having a conversation about their finances is a start.

(2) Plan

Much of the fear is of the unknown. The more everyone knows of a plan of action, the more the fear is eased. However, parents are not use to sharing their intentions with their children. It is important to show the parents the benefits of planning ahead, especially in regards to respecting their wishes how they will live the last few years of their lives and how their estate is handled. Yet, this is a hard conversation to have because your parents will need to face their own mortality.

(3) Cooperation

This is a team effort to take care of elderly parents. Siblings need to be on the same page and understand who is going to take care of what part of the plan. Some siblings may be able to offer more financial support while other siblings may be able to offer day-to-day support. Make sure you understand what each sibling is willing to do and find middle ground, including at what stage assisted living or nursing home will be considered.

The key is to get everyone to the table to talk about the issues. If they do not want to cooperate, then let them know how you feel about them not participating (e.g., fear and worry). If this does not help them to get a discussion, then you have every right to set boundaries now with them on what you are willing and not willing to do when the time that they may seek your assistance.