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As your parents get older, you may be moving away from a difficult conversation about how much they’ve saved for retirement or what they plan to do once they start collecting their income. social security benefits. It can be difficult to broach the subject of retirement with your aging parents, but if they haven’t stashed enough in a 401 (k) or IRA, you or your siblings could become their retirement plan.
If you’re waiting to have a conversation with your parents about their retirement plan, you shouldn’t postpone it any longer: A recent Federal Reserve report found that over 25% of non-retired adults don’t have a pension . savings at all. According to a 2020 AARP report, nearly a third of adults with at least one living parent provide them with financial support and more than 40% plan to provide support in the future.
Whether your parents end up living in your home during retirement or you are just helping them with some of their bills, it’s important that you understand how prepared they are for their non-working years and how they expect. that you help them. And you can encourage them to start saving now before it’s too late.
Select spoke to two personal finance experts about telling your parents about retirement, how to help them plan for their retirement, and why you may need to set limits.
Having the conversation about retirement
First, you should ask your parents what they are planning for retirement, says Cindy Zuniga-Sanchez, founder of Zero-Based Budget. For example: do your parents want to live in your house and help you take care of your children or would they prefer to live alone?
It’s important to have clear and honest communication with your parents or siblings, says Zuniga-Sanchez. Parents may be reluctant to talk about money because of their pride. According to Stefanie O’Connell Rodriguez, host of the Real Simple Money Confidential podcast, children can appear patronizing when approaching retirement with their parents because it is a role reversal of the traditional parent-child dynamic. To parents, it may seem like their kids are now teaching them about their finances.
O’Connell Rodriguez recommends that people start the conversation by depersonalizing it. You might want to mention a story you heard about a parent who forgot to write a will or a statistic you read about how a significant number of people are saving for retirement before they die. ” start a conversation about your parent’s personal finances.
You will also need to communicate with your siblings and other family members on how they are willing to help. Some may be able to contribute more financially, while others may spend more time looking after their parents physically.
Get a clear picture of your parents’ finances
In order to understand how much you might need to help out, you’ll need to get a sense of how much your parents have in their savings, current income, and debts, Zuniga-Sanchez explains. This means that you will need to know what types of retirement accounts they have, such as a 401 (k), a traditional IRA, or a Roth IRA. Additionally, you want to understand what other assets they own, such as investments in a brokerage account or a house.
If they haven’t started saving for retirement, it’s never too late to start. You could encourage your parents to open a Roth IRA, which allows individuals to contribute with after-tax money, and then receive untaxed investment gains. If your parents are over 50, they will be able to make catch-up contributions up to $ 1,000 more than the maximum contribution, which is currently $ 6,000 ($ 7,000 total for those over 50). Their investment portfolio will also likely be more conservative, with a higher allocation of bonds and fewer stocks to minimize risk as they are closer to retirement.
If you want a more empowered approach to investing for retirement, you should consider signing up for a robo-counseling service like Wealthfront and Betterment. All you need to do is enter information about yourself, such as your investment goals, time horizon, and risk tolerance. Thereafter, the robo-advisor will create a portfolio based on your preferences, usually consisting of low-cost index funds or exchange-traded funds (ETFs). Over time, the robo-advisor will automatically rebalance your portfolio by periodically buying and selling stocks. Wealthfront and Betterment both offer Traditional and Roth IRAs.
Zuniga-Sanchez recommends that individuals be precise with the numbers and perform calculations on how much money they will be able to save given their time horizon and the amount they will receive from Social Security. For example, if a parent receives $ 2,000 a month from Social Security, you’ll want to know how much that covers and how much more it will take to cover essential expenses such as food, shelter, transportation, and health care. For parents who are undocumented or who have stayed at home to care for the children, they will receive little or no Social Security benefits, so you will need to take this into account as well.
Finally, you’ll need to find out if your parents have any debt they need to pay off, whether it’s credit card debt or a mortgage. Zuniga-Sanchez suggests taking a credit report with your parents to get an idea of ââhow much debt they may have. You can receive a free credit report each year from AnnualCreditReport.com.
Decide how you can help
After getting a picture of your parents’ finances, you will need to determine how to help them fit into your own situation. Zuniga-Sanchez notes that it is important for children to prioritize paying off debts and saving for retirement.
âYou need to make sure you’re comfortable with your own budget, with your own retirement, your own expenses, and your own debt. And from there, that’s where you [figure out] your parents’ retirement, âsays Zuniga-Sanchez.
For some children, helping their parents can mean smaller contributions, like paying their monthly utility bills, or larger acts of service like having their parents move in with them.
If your parents are going to move in with you, think about how much it might cost you to move to a larger space, or how much more you could spend on groceries. According to a 2018 Pew study, the number of multigenerational households has been increasing since 1980, with nearly 20% of the US population living in multigenerational households in 2016.
Zuniga-Sanchez notes that it is important that you discuss this with your partner, especially if the partners have different cultural expectations about it. The Pew study found that Asians, Hispanics, and immigrants of all races were more likely to live in multigenerational households than white populations.
You’ll also want to consider pooling money with your siblings to create a separate family emergency fund, in case your parents need the extra cash to dip into their retirement. If you don’t have enough to contribute a large lump sum to the fund, you can start by automating a small amount like $ 50 each month before increasing it. Consider opening a high yield savings account for your emergency fund. High yield savings accounts have higher interest rates than traditional checking or savings accounts and allow you a number of free withdrawals, so your money stays liquid.
At the end of the line
It’s easy to avoid having a conversation about your parents’ pension plan, but the sooner you get it, the better. Once you know how much they’ve saved, what standard of living they want in retirement, and how much debt they have, you’ll have a better idea of ââhow to help them. You’ll also want to be honest with your siblings and other family members about how much time and money you can spend with your parents in retirement.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.