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Retirement

It’s a fact: multigenerational households are becoming more common in the United States. In the ’50s, it wasn’t unusual for older adults to live with their grown children and possibly grandchildren. That living arrangement trended downward for several decades, but saw a big upswing between 2000 and 2014. In fact, in 2014, 19% of Americans — 60.6 million people — lived in households that included at least two generations of adults.

The economy explains some of these trends. When retirement funds crashed during the Great Recession, older adults may have suddenly found themselves unable to financially make it on their own. Now, couple that with rising housing costs and a shaky job market. The result is that many middle-aged children caring for elderly parents can’t afford to put mom and dad up in a care facility.

You can’t trace the entirety of this trend to the economy, though. Actually, some of it is due to increasing diversity in America. The Pew research shows that more families with Asian, African American, and Hispanic backgrounds are likely to live in a multigenerational household. This is likely due, at least in part, to upbringing and the cultural expectation that adult children are to support their elderly parents.

Regardless of culture or background, many adults expect to have at least some role in caring for their parents when they’re no longer able to do so themselves. But what this looks like — and the financial and emotional toll it takes — can vary from family to family. If you think you might be in this situation in the coming years, start taking the following steps now:

1. Consult your spouse and siblings

The first step in deciding how to help your aging parents financially isn’t necessarily to talk to your parents. Sure, the conversation might come up. But before you commit to anything or set expectations, consult with your spouse and any siblings who are in the picture.

It’s essential to be on the same page about elderly care with your spouse. Financially and practically supporting one (or more) spouse’s parents can put some serious strain on your marriage. So, talk to your spouse about what you would like to do for your parents. Then, reach an agreement on what you, as a couple, are willing and able to do — financially, but also practically and emotionally. Also, decide ahead of time what boundaries you need to put in place, in order to preserve healthy relationships all around.

You’ll definitely want to pull in your siblings for this. See how much they’re willing and able to contribute to your parents’ care, financially. But again, also consider the practical aspects of caring for them. Who is most able to take on emotional support roles? Who is best at dealing with practical details? Does one of the siblings prefer to have mom or dad live with their family, or do you need to work together to support your parents in a care facility or retirement community?

Having these conversations before approaching your parent(s) can help everyone stay on the same page.

2. Talk with your parents

Next, you’ll want to have a frank conversation with your parents. You don’t have to start by laying out the nitty-gritty details of their budget. Instead, try talking more generally about your parents’ goals and needs as they approach old age. Do they want to live on their own as long as possible? Have they considered a retirement or assisted living facility, depending on their physical and medical needs? Do they expect to be healthy well into old age, based on their ancestry? Or are health problems already cropping up and complicating matters?

Read More: How to Afford Healthcare in Retirement

During this conversation, you might bring up some of the options you’ve already thought out. Whether that’s helping your parents settle into a nearby assisted living facility or adding an in-law suite to your home, present these options as just that… options. Unless your parents are at the point where they are no longer capable of making sound decisions, you should try, wherever possible, to defer to their judgement and preferences.

3. Understand the financial situation

Once you’ve gotten a feel as a whole family — spouse, siblings, and parents — for everyone’s needs, preferences, and boundaries, it may be time to have a more frank conversation about money. By this time, you should already know what you are willing and able to contribute to your parents’ care and well-being. Hopefully, you also have an idea of what, if anything, your siblings can contribute.

Now, it’s time to figure out where your parents are financially. You might even want to consider pulling in a financial planner who can look holistically at your parents’ investments, retirement accounts, and other assets. This can help you get a more objective view of the best way to allocate resources.

Related: Moving Assets Into a Revocable Living Trust

Digging into the financial details may be awkward. But it’s essential in this decision-making process, as the available resources — including government-funded benefits, Social Security, and assets — will tell you what options are available to your family now and in the future.

4. Consider long-term care insurance

If there are potential health issues in the picture — or if mom and dad don’t have enough money to handle potential assisted care — consider long-term care insurance. This is an insurance product specifically for paying for long-term healthcare, often including assisted living and in-home care that isn’t covered by insurance or Medicare. Depending on your parents’ current health status, premiums may be relatively affordable. And you could consider paying for premiums yourself — or with the help of siblings — to reduce the risk of having to pay out loads of money for long-term care in the future.

5. Put a plan in place (and have a backup)

Once your family has worked through all of these issues — probably over the course of several month or even years — it’s time to put a formal plan into place. This might include steps like adding an in-law suite to your own home, or converting some space you already have in order to move your parents into your home. Or it might require you to visit local assisted living and retirement communities, to be ready to move mom or dad there when the time comes.

Whatever you plan, though, make sure you have a backup. This is especially true if your goal is to move your parents into your own home. Often times, this is an excellent fit and winds up benefiting everyone. But if medical or mental health needs become more complex, this arrangement may not work out as well as you’d hoped. Always hope for the best, but plan for the worst. In this case, you may need to plan for an alternative living situation, or figure out how you could afford in-home care to help lighten the load.

6. Make it all legal

After the plan is made, it’s a good idea to ensure that a responsible sibling has medical power of attorney and financial power of attorney for your parents. While you’re helping your parents get these documents drawn up, it’s a good idea to have them go over their will with an attorney, as well.

Planning Your Estate? You Need These 3 Documents NOW

In the end, it’s up to your parents, as long as they are of sound mind, to decide who has power of attorney and how to spell out their own will. And they may prefer to work these documents out directly with an attorney. If that’s the case, simply make sure you know who has power of attorney and where copies of their documents are stored, in case you should ever need them.

7. Start helping out early

As memories start to fade or medical needs get complicated, older adults occasionally have trouble managing their finances. If you notice this happening to your parents, you may want to start helping out with their finances sooner rather than later. Sometimes this is as simple as helping them write a budget and set up automatic bill payments so things don’t get missed. Or it may be more complicated, like managing investment accounts to make the most of the savings.

Related: 7 Free Tools to Help Aging Parents With Their Money

Caring for elderly parents can be stressful — both emotionally and financially. Taking the time now to plan ahead for this eventuality will help take some of the stress out of the situation for everyone.

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If you’ve been paying attention to financial news, you’ve probably heard mention of the fiduciary rule. This rule was approved last year under the Obama administration, with the goal of increasing transparency within the investment realm. It was designed to force advisors to suggest investment products to their clients that were more affordable, rather than being able to suggest ones that instead provided these advisors with higher commissions.

While the rule has not yet been implemented (it was slated to go into play this April), it looks like its run may be short-lived. Today, President Trump signed an executive order that is likely to halt the implementation of the rule, along with ordering a widespread review of the Dodd-Frank Act.

fiduciary rule

This has many up in arms, as the fiduciary rule seems to be a matter of common sense and integrity. Forcing ALL advisors to offer their clients less expensive investment products, rather than higher priced ones that may result in bigger commissions, seems like a great idea. Transparency throughout any industry should be mandatory… so why nix the rule?

Yes, There Is Already a Fiduciary Obligation…

For almost 80 years, a fiduciary obligation — called the fiduciary standard — has been in place. This was implemented with the Investment Advisors Act of 1940, intended to affect most types of investment accounts. This standard implements an expectation that advisors need to place their client’s interests ahead of their own. The advisor is always supposed to act in the best interests of their clients, in every situation, whether the client is aware of it or not.

The reach of this standard is far and wide. An advisor cannot, for example, make trades on a client’s behalf that would result in higher commissions or fees for himself or his firm. An advisor is supposed to make all efforts to ensure that the investment advice given is not only accurate, but complete. They are bound to a “best execution” standard, while dictates that the purchase and sale of securities should be completed with the best possible combination of low cost and efficiency. Advisors are also prohibited from buying securities for themselves before they buy them (or advise their purchase) for their client.

Lastly, and perhaps most importantly, the existing fiduciary standard already prohibits the potential of conflicts of interest. In fact, if a potential conflict of interest is present, the advisor must disclose this to the client before any trades take place. Which begs the question…

Then, What Would the Fiduciary Rule Even Change?

As mentioned, the fiduciary standard already has provisions to avoid and prohibit conflicts of interest between advisors and their clients. This is, of course, the heart of the fiduciary rule… so why the new implementation?

Well, the difference primarily lies in the types of retirement account providers to which the existing rule applied.

As it stands today, the fiduciary standard does not technically apply to insurance reps, broker-dealers, and financial company reps (other than investment advisors). These individuals, instead, are bound by the suitability standard.

The suitability standard is much simpler and much less comprehensive. In a nutshell, it says that an advisor only needs to assess a client’s risk and tolerance before offering investment products and advice. Essentially, gathering a client’s preferences is enough, as long as the products the advisor subsequently recommends match those preferences. This opens up the possibility of a very large grey area… if an advisor simply believes that a product suits a client’s risk tolerance, it’s fair game.

The new rule, though, would make sure that everyone was bound to the fiduciary guidelines. Rather than having the freedom to pick financial products that simple lie below a client’s threshold, all advisors would need to first disclose the fees, limitations, conflicts of interest, etc. of the product. As of now, just the designated investment advisors are bound to such. The fiduciary rule simply hoped to expand this rule to anyone and everyone offering any sort of investment-related advice.

Why It’s Happening

Well, the argument seems to be that the fiduciary rule could actually harm many of the lower-income investors out there, in a number of ways. First, it would prevent advisors from recommending more expensive investment products to their clients when lower priced alternatives exist — even if the higher priced ones were a better match in the end.

Forcing advisors to be transparent about fees and compensation sounds like a great idea, unless the client then chooses their investment product based on this information alone. If an advisor puts three different funds in front of a client, with one having a noticeably higher rate of commission, the client is less likely to lean toward that fund. But what if it had a good chance of outperforming the others? To combat this, potential investors would need to take into account all components of a financial product, not just seek to avoid fees where they could.

Does limiting suggestions to lower cost financial products actually harm the client? Could narrowing their options actually be taking away their investment freedom, causing harm in the long run? Some fiduciary rule-protesters think so.

Another way that this rule could harm lower-income investors is through financial advisor services. Today, some companies are able to offer free or low-cost investment advice to their customers. The new regulations threaten to increase their fees for providing such, resulting in some of the smaller savers being denied advice or simply being unable to afford it.

The Impacts Overall

The fiduciary rule has also been challenged as detrimental to the smaller firms and dealer-brokers in the industry. The cost of compliance with the rule is expected to be high, with additional technology and compliance experts being an added, necessary investment.

As a result, we could expect to see many of these companies disband or be acquired. It’s actually already being seen, in the case of American International Group and MetLife Inc. brokerage operations. Both of these have already been sold off in anticipation of the fiduciary rule’s April 10 implementation date.

What does this really mean, though? Less diversity in the industry, for starters, as the independent companies disappear. Also, as the consolidation continues, it threatens to eliminate (or make difficult to find) advisors who will be able to offer smaller plans. Once again, this has the potential to greatly impact the lower-income investors.

It’s interesting to note that when the United Kingdom implemented a similar rule in 2011, their investment industry had exactly this response. Independent companies could not keep up or could not afford to comply with the technology and changes required. So, they forged paths with larger corporations. As a result, the number of financial advisors in the U.K. has dropped by a whopping 22.5% ever since, creating an even bigger guidance gap than had previously existed.

This effect makes it easy to see why the fiduciary rule has been referred to as “Obamacare for your IRA.” While the rule is necessary and important in many ways, its impact of narrowing the advisor industry down to fewer and fewer options is certainly a check mark in the negative column. Having options and healthy competition between companies is generally a big benefit for consumers.

All Hope Is Not Lost

For proponents of the fiduciary rule who are appalled to see its (likely) overturn today, I have some good news. Many of the financial services companies that were slated to be impacted by its April roll out are going to move forward with their new standards. They had already put new changes in place and believe that transparency is an important part of the advisor-investor relationship.

Companies like Morgan Stanley and LPL Financial Holdings, Inc. have both said that they still plan to move forward with the new standards that they have already worked to create. Hopefully, this idea of working in the best interest of the customer catches on and spreads, on its own, throughout the industry.

Until then, we wait and see.

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If you plan to retire early, you may be wondering whether it makes sense to invest in traditional retirement accounts, such as employer-sponsored 401(k)s/403(b)s and IRAs/Roth IRAs. The speculation comes into play because there’s an early withdrawal penalty when you take money out of these accounts before age 59 ½.

I argue that it’s still a good idea to invest in traditional retirement accounts if you plan to retire early. This is because there are tax benefits that come with these retirement plans. Money contributed to employer sponsored 401(k)s/403(b)s are pre-tax and reduce your taxable income for the year. Money contributed to Roth IRAs isn’t pre-tax but the money grows tax-free.

The best scenario is to have enough money outside of these retirement accounts so that you can live off other investments before age 59 ½ and then tap into your retirement accounts after turning 59 ½. Here are a few tips to aid you in your early retirement planning.

Avoid Early Withdrawal Penalties

Generally, the money withdrawn from a retirement plan before the age of 59 ½ is considered “early” or “premature.” When this happens, you must pay an additional 10% early withdrawal tax. For most, that 10% penalty is a big deal. It will likely result in enough money lost that you’ll want to avoid making early withdrawals.

One thing you can do to avoid early withdrawal penalties from retirement plans is to have other investments. We’ll get to that in a moment.

Another way to avoid early withdrawal penalties is via the IRS rule 72(t). This rule permits penalty-free withdrawals from an individual retirement account (IRA), provided that you take “substantially equal periodic payments (SEPPs)” for at least five years or until you reach 59 ½, whichever period of time is longer. The payment amount will depend on your life expectancy as calculated by IRS-approved methods.

The withdrawals will still be taxed at your normal income tax rate. You can roll over a portion of your 401(k) into an IRA to take advantage of this rule as well. A good guide for IRA conversion can be found here on Dough Roller.

The IRS rule 72(t) is a bit complicated. You may want to work with a financial advisor to make sure you are complying by the rule’s stipulations. If you stop payments too early, you’ll have to pay the early withdrawal penalty on the previously withdrawn amounts.

It’s good to know there’s a way to access your retirement plan funds without the early withdrawal penalty. But, that doesn’t have to be the only option if you plan to retire early. Another option is to have other investments that you can liquidate before you turn 59 ½.

Plan on Other Investments

The best thing you can do is not touch your retirement plan funds until you reach age 59 ½. It’s best to have other investments that you can use as income until you reach IRS retirement age. This means you’ll have to do even more saving during your early years. But it’s worth it for the sake of early retirement.

Here are some options for where to save the rest of your money:

  • Savings accounts and certificates of deposit (CDs) – These accounts offer lower interest rates but guaranteed returns. Your money is also FDIC insured up to at least $250,000.
  • Peer to peer lending – Companies like LendingClub and Prosper let you build an investment portfolio of personal loans. This gives you monthly cash flow.
  • Rental properties – This investment takes some time and skill. But it also offers monthly cash flow as long as you have tenants.
  • Dividend stocks – You’ll gain money in two ways. First, you’ll earn as the value of the stocks appreciate. Second, you’ll gain money from distributions paid out to shareholders by the dividend-paying companies.

You can use these investments to fund your lifestyle until you reach IRS retirement age. Depending on the age you plan to retire, you may not even need that much to sustain you until you reach 59 ½. It’s all about planning ahead of time.

Consider Phased Retirement

Most people work a long career and then jump right into retirement and stop working altogether. If you plan to retire early, though, that doesn’t necessarily have to be the path for you. Consider phased retirement as an alternative, in order to make early retirement work for you.

For example, if you work an office job now and want to retire at age 40, you can leave that day job and then start another career. You could start an online business that doesn’t require you to go into an office. Use the time between when you leave your first career and when you reach age 59 ½ to explore another one of your interests. Have you always wanted to write books? Do you have a passion for working with animals? The possibilities are endless.

Finding a new career to embark on during the first few years of early retirement will not only give you extra money to live on, but it’ll also keep you mobile and energized. Make sure it’s something you enjoy so you can still consider yourself “retired.”

Final Thoughts

Yes, you should invest in traditional retirement accounts if you plan to retire early. They have many tax benefits that make them good investments. What you want to avoid is early withdrawal penalties. You can avoid this by taking advantage of the IRS rule 72(t) as explained above. Or, you could have other investments that fund your lifestyle until you reach age 59 ½ and can withdraw money from your retirement plans penalty-free.

Another consideration to keep in mind is phased retirement. Although you retire from your day job at an early age, that doesn’t mean you don’t have to work at all. Consider starting a new career based on another one of your interests or passions. This way, you’ll keep some money coming in until you reach age 59 ½ — and can withdraw from the traditional accounts — but you’ll still enjoy your early retirement.

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Retirement is a huge financial undertaking, as we all know. It requires plenty of planning to ensure that all of your needs will be met once your career, and working income, ends. It needs to be able to cover your costs of living, some fun money to actually enjoy your years, and expenses such as healthcare. Of course, the latter become becomes even more important as we age, but many seem to overlook the magnitude of this expense in their planning.

The average person between the ages of 55 and 74 with retirement savings has only $104,000 to $148,000 tucked away in a defined benefit account. What’s even more concerning is that this statistic only reflects 48% of American households. The rest of them have no retirement savings at all.

Those with retirement savings tend to also have other resources to depend on, such as non-retirement investment accounts. On the other hand, those without retirement savings tend to have less of those resource, too.

What does this mean for costs associated with retirement? It means that many Americans will struggle to afford to retire at the standard age of 65. And those who do will have trouble meeting their monthly expenses, including health care.

In fact, 74% of married partners said they worry about unexpected medical costs in retirement. With the cost of health care in retirement being such a big concern, it’s important to consider the actual numbers and plan accordingly.

How Much Does Health Care Cost In Retirement?

According to a 2015 study conducted by Fidelity, a couple, both aged 65, can expect to spend about $245,000 on health care during their retirement. That’s over $12,000 a year — or $1,000 a month — based on average life expectancy!

Why is this so expensive? When you factor in copays, out-of-pocket costs, and dental and vision care, you’ll easily see how the numbers add up quickly. That’s exclusive of any insurance premiums, too.

Speaking of health insurance, here’s a breakdown of how insurance provided by the government works:

Medicare Part A

Hospital Insurance

As long as you or your spouse paid Medicare taxes while working, you won’t have to pay a premium for this coverage.
It mainly covers hospital inpatient care, skilled nursing facility care, hospice care, and home health care.
Medicare Part B

Medical Insurance

Most people will pay $104.90 per month.
It mainly covers services from doctors, outpatient care, durable medical equipment, and some preventive services.
Medicare Part C

Medicare Advantage Plus

Monthly premium varies greatly, but can be up to $200 per month.
It mainly covers everything in Parts A and B and is run by Medicare-approved private insurance companies.
Medicare Part D

Prescription Drug Coverage

Monthly premium varies greatly, but can be up to $100 per month.
It mainly helps cover the cost of prescription drugs.

As you can see, if you opt for all parts of government-provided medical insurance, you can pay up to $400 in monthly premiums per person. This is exclusive of the other costs associated with health care as mentioned above: copays, out-of-pocket expenses, and auxiliary care.

There are ways plan for these expenses, however. The main thing you can do is start saving early.

How To Plan For Health Care Costs In Retirement

Your first plan of attack should be your employer’s retirement account, if one is offered. According to the American Benefits Council, nearly 80% of full-time workers have access to an employer-sponsored defined benefit account, such as a 401(k)/403(b). So if you’re one of many offered this benefit, make sure you take advantage.

Saving even just a small percentage of your salary will make a big difference if you start early. You can begin by saving a mere 3% of your salary, then gradually increase your contributions until you reach 10%. This is generally considered the target amount to save.

This is just a recommendation though. If you can contribute even more, by all means do so.

If you max out your 401(k)/403(b) by contributing $18,000 in 2016 ($24,000, if over the age of 50), investing in an individual retirement account (IRA) is a great next step. Although the annual contribution limit for IRA’s and Roth IRA’s is much lower than that of 401(k)s/403(b)s, the extra savings will help you cover cost of your future health care.

Lastly, saving money in a Health Savings Account (HSA) is a great way to plan for covering medical expenses in retirement. If you are currently enrolled in a high-deductible health insurance plan, you are eligible to contribute to an HSA.

HSAs offer a triple tax benefit. First, HSA contributions are tax deductible. Second, the interest earned on money in an HSA is tax-free. Third, you can withdraw money from your HSA for qualified medical expenses tax-free, as well.

HSAs can be considered retirement funds because there is no carry-over limit, unlike Flexible Spending Accounts. So, the money you contribute today can be used for health care costs in retirement years later.

How To Offset Health Care Costs Once In Retirement

In today’s economic environment, retirement doesn’t necessarily meaning relaxing on sandy beaches. The unfortunate reality is that many people must continue to work in order to supplement Social Security and their minimal retirement savings.

Working a part-time job during the early years of retirement can greatly offset the cost of health care. In fact, you could even save some of your earnings from your part-time job and put it into a retirement savings account to use in future years.

Here are a few ideas of part-time jobs you can take up that won’t be taxing on your health:

  • Consultant: Transfer all the skills you accumulated from your day job over the years and use those expertise to help other companies accomplish their goals.
  • Freelancer: Use your talents to do one-off assignments for businesses. This could include graphic design, writing, proofreading, and much more.
  • Blogging: It can take a while to make money from a blog. But once you get the ball rolling, this gig can bring in a lot of income.

Other Things To Consider

Aside from Medicare, Social Security, and your retirement savings, there may be other ways to cover the cost of health care in retirement.

One thing to consider is COBRA. Under the Consolidated Omnibus Budget Reconciliation Act, federal law requires that companies with more than 20 employees give them the option to continue receiving coverage under the employer’s health plan for at least 18 months.

With COBRA, however, you’ll be responsible for the entire cost of the health plan. While working, your employer likely paid for a large percentage of the premium. This expense will be wholly your responsibility with COBRA.

You may want to consider continuing your employer’s health plan before enrolling in Medicare. Your employer’s health plan will likely cover more medical expenses.

On that note, if you want a more comprehensive health insurance plan after your COBRA benefits end, you can consider enrolling in a Marketplace health insurance plan. If you don’t enroll in Medicare, you may qualify for lower out-of-pocket costs and premium tax credits. You could also use the two in combination; but you won’t receive the same tax credits for the Marketplace health insurance plan.

Wrapping Up

There is a lot to consider on the topic of health care costs in retirement. If you’re young, the lesson here is to start saving early, because the cost of health insurance and medical care is only increasing. If you’re approaching retirement age, you may want to consider working part-time during your early retirement years, in order to offset the costs of health care. And if you’re already retired, it wouldn’t hurt to tuck away any extra money each month, in case unexpected health concerns pop up.

How are you planning to cover your health care expenses in retirement? Is it a big concern to you yet?

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Why 60,000 Morgan Stanley Employees are Suing Over Their 401(k) Accounts’ Management

by Stephanie Colestock

If you’re unhappy with your 401(k), rest easy… you’re not alone. In fact, on August 19, over 60,000 employees joined up and filed a class action lawsuit against their employer, Morgan Stanley. Their reason: questionably managed and poorly performing 401(k) plans. It’s one thing to ask workers to stay late or forget to restock the […]

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