Financial Planning Tips for Caregivers
Caregivers are often so focused on managing their parent's health and financial needs that they don't even think about their own future needs. Although your focus is on providing care for your loved one, it's important to think about and prepare for your own future financial and caregiving needs. If you haven't done it already, now is the time to start planning for own your retirement.
"It's hard to find the time, but planning for your financial future is a necessity," says Erika Mielke, a Wells Fargo Private Bank senior wealth planning strategist. "Thinking about the dollars and cents of your own retirement is the best way to ensure you have the funds you need as you age."
Mielke suggests these tips to help caregivers plan for their own financial future.
Take full advantage of employer programs
If you or your spouse is employed, make sure you are taking full advantage of the financial programs your employer offers. Some examples:
- 401(k) – The 401(k) is set up by your employer and is designed to help you save (and build) money for retirement. The money you contribute to your 401(k) is pooled and invested in stocks, bonds, mutual funds, or other types of investments. You choose the type of investment from your company's list of options. Usually your contribution is deducted from your paycheck before taxes and goes directly into your 401(k) account.
- Company matched contributions – Many companies will make a matching contribution to your 401(k). Your employer might match 10 percent, or even 100 percent of your contribution to your retirement account. This is like getting a bonus, so it pays to put in as much as you can afford. Understand how your employer is matching contributions. Some will match your contributions with company stock. As a result, a large portion of your investment will be in company stock. "Diversification is important. As a general rule, you don't want more than 10 percent of your net worth in any one asset," Mielke says. Check with your HR department on rules and restrictions for re-balancing your funds, which would enable you to sell some company stock and re-invest it.
- Flexible Spending Accounts (FSA) – Depending on the type of health plan you have, you may be eligible for a flexible spending account. An FSA lets you set aside money, and the funds are taken out of your paycheck before taxes. You can use the account throughout the year to get reimbursed for eligible health care and dependent care expenses (including elderly parent care expenses) However, FSAs are set up and owned by the employer, so how much you can contribute is determined by your employer. If you change jobs, you can't take your FSA with you. Also, you must use all the money in the FSA by year-end, or you lose it.
- Health Spending Accounts (HSA) – If you have a high deductible health plan, you are eligible to create an HSA. An HSA has different rules than an FSA. The maximum a family can contribute annually is capped by the IRS at $6,250. It is a bank account that you own and you can invest it as you choose. You can only access the amount of money that's in your account. When you start contributing – in January for example – you will have less money than you'll have later in the year. An HSA is not "use it or lose it" meaning if you don't spend all the money in the account by year-end, it rolls over to next year, and you can take it with you if you change jobs.
The IRS caps the amount you can contribute to your retirement plans at $16,500. That includes 401(k), 403(b), IRAs, etc. Once you have contributed the matching amount to your 401(k) and if you are able to contribute more, then you will want to explore whether to add more to your 401(k) or whether an IRA might be good for you. Depending on your income, a Roth IRA might be a good choice because the money goes in after you've paid taxes. The money grows over time, and when you take it out, you don't pay taxes on it again.
Don't "set it and forget it"
Whether you have your money in 401(k), IRA, company stock or any other investment option, keep tabs on where your money is being invested. Too many people make a choice when they sign up for the plan, then let it ride, and never make changes to it. "Don't set it and forget it," Mielke advices. "Be involved in how your money is allocated. In most cases, as you get closer to retirement, your portfolio should be shifted to include less risk." She recommends having a conversation with a financial advisor. If your plan is administered by a financial firm, find out if they have advisors you can speak to. If not, hire one yourself. It's a critical step in financial planning.
Think about long-term care now
"Caregivers are on the front lines of seeing first-hand how much long-term care facilities cost," Mielke says. However, too many don't think about their own long-term care needs. Long-term care is an insurance policy that covers costs that arise when a person needs on-going care including home care, hospice care, nursing home care or care in an assisted-living facility.
Mielke says the best time to buy long-term care insurance is usually in your 50s. That's when the prices are the best, but it can still be affordable after that. Before you buy, know the terms, and fully understand the policy you choose. Some questions to ask about any long-term care policy you are considering: What are the maximum daily benefits? How long will coverage last? Is coverage transferrable between spouses? If you don't use it, does it turn into life insurance? Does the policy take inflation into account?
Another aspect of financial planning is insurance. Do you have the right type of life insurance? There are many different options, such term or whole life available, and finding the right type depends on your personal situation.
Property and casualty is another insurance caregivers should consider. If other caregivers are caring for your parent inside the home, how are they insured? What if they are injured? What is the liability to the homeowner? "Getting umbrella coverage with your property and casualty that is equal to your net worth is relatively cheap, and it prevents against your net worth being wiped out due to an accident," Mielke suggests.
Legal documents: Key to financial planning
In addition to building a solid financial base, caregivers must have legal documents in place, such as financial power of attorney, healthcare power of attorney, and a will. Each document serves a specific purpose. For example, POA indicates what will happen if you are incapacitated and unable to make decisions for yourself while you are alive. A will covers how your estate is handled when you die. The various financial documents work together to ensure your wishes are carried out.
Legal documents coordinate with financials – which is why they are a key part of good financial planning. Make sure you work with an expert to ensure everything is titled appropriately and that the POA, will, and life insurance documents are examined in conjunction with financial planning documentation.
Not all financial planners are created equal
When it comes to financial planning, don't go it alone. Every state has different rules; IRS regulations are constantly changing; and legalese can make even the savviest consumer's head spin. It's best to work with a professional who will take the time to understand your goals and individual situation and advise you accordingly.
However, not all financial planners are created equal. Some financial planners are tied to specific companies, products and services. These organizations tout "free financial planning assistance." However the financial planner you work with is incented to sell you that company's products and services. They are being compensated for the products they sell. A better option might be to find an independent financial planner that is not tied to a particular financial firm. They charge a fee for their services, but you will get unbiased advice, and find the right products for your needs.