Caregivers are often so focused on managing their parents’ health and financial needs that they push their own needs to the back burner. This may fly for a short time, but turning this approach into a long-term solution can have dire consequences. Although your attention is pulled in countless directions on a daily basis, it is crucial to think about and prepare for your own financial future, retirement and long-term care needs. If you haven’t done so already, or if caregiving has caused you to diverge from the plan you had previously set for yourself, now is the time to conduct a financial wellness check and get back on track.
Personal Finance Tips for Family Caregivers
“It’s hard to find the time, but planning for your financial future is a necessity,” says Erika Mielke, senior wealth planning strategist at Wells Fargo Private Bank. “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.”
When you’re caring for an elderly parent or an ill spouse, it can seem like current expenses make it impossible to set aside funds for the future. In fact, countless family caregivers wind up draining their savings to make ends meet during trying times. Don’t let money problems get the best of you. Instead, make a budget and determine what you can afford to put aside. Remember, even a small amount is better than nothing.
If you find that there’s no room in your current budget to contribute to savings of some kind, then it’s important to buckle down and find a way to achieve better financial health. This may mean helping your care recipient spend down their assets and apply for Medicaid or researching other benefits and financial resources to take some of the strain off your own wallet. It might take some time, but once you’re more financially stable, you can reassess and put a new plan into action that factors in your retirement goals.
To get started, Mielke offers the following tips to help caregivers manage their money better in the present, ensuring a brighter financial future.
Make the Most of Employer-Sponsored Benefit Programs
If you or your spouse is still working, make sure you are taking full advantage of the benefits the employer offers. Some examples include:
- 401(k) plans. A 401(k) plan is set up by your employer and 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 may choose the type of investment products you want from your company’s list of options. Contributions are automatically deducted from your paycheck before taxes and deposited directly into your 401(k) account. These funds and their earnings continue to grow on a tax-deferred basis.
- 401(k) employer matching. Many companies will make a matching contribution to an employee’s 401(k) up to a certain percentage of their salary. This is like getting “free money,” so it pays to contribute as much as you can afford to maximize what your employer will match. 401(k) matching programs vary, so it’s important to understand how your employer matches contributions. Some offer dollar-for-dollar matches, others feature up to 50 percent matching and certain companies may even match contributions with company stock. In the latter case, a large portion of your investment will be in company stock.
“Diversification is important,” Mielke notes. “As a general rule, you don’t want more than 10 percent of your net worth wrapped up in any one asset.” Check with your HR department for information on rules and restrictions for re-balancing your funds, which would enable you to sell some company stock and re-invest that money elsewhere.
- Flexible Spending Accounts (FSAs). FSAs can be useful tools for covering out-of-pocket health care costs and reducing taxes, but they aren’t necessarily a good fit for everyone. An FSA lets you set aside pre-tax money in an account from which you get reimbursed for eligible health care, dental care and dependent care expenses. However, FSA contributions are limited to $2,700 per year per employer, and, if you change jobs, you can’t take your FSA balance with you. Some employers even make contributions to FSAs. Generally, you must use all the money in your FSA by the end of the plan year, or you lose it. However, some companies either offer a grace period of two and a half months to use remaining funds or allow employees to roll over a maximum of $500 in their FSA plans each year.
- Health Spending Accounts (HSAs). FSAs and HSAs are very similar, but an employee is only eligible to open an HSA if they have a high-deductible health insurance plan. The maximum an individual can contribute to an HSA is $3,500 annually, and a family can contribute up to $7,000. It is a bank account that you own and can invest in as you choose. Unlike FSAs, an HSA is not “use it or lose it,” meaning the funds roll over from year to year and you can take it with you if you change jobs. Some employers make contributions to HSAs as well.
Consider Opening an Individual Retirement Account (IRA)
The IRS caps the annual amount you can contribute to employer-sponsored retirement plans like 401(k), 403(b) and other government plans at $19,000. If you have contributed the maximum matched amount to your employer’s retirement plan and you are able to contribute more, then you will want to explore whether adding more to this account or opening a separate IRA might be more beneficial. Depending on your income, a Roth IRA might be a good choice because contributions are taxed up front and can grow and be withdrawn tax free. With a traditional IRA or 401(k) plan, contributions are tax-deferred initially, but you must pay income taxes on withdrawals later on.
Take an Active Role in Managing Your Portfolio
Whether you have your money in a 401(k), an IRA, company stock or any other investment option, keep close tabs on where your money is invested and how it is performing. Too many people choose investment options when they sign up for a plan and then leave it alone for years. “Don’t set it and forget it,” Mielke advises. “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.”
A financial advisor is an excellent source of information and advice on managing investments and planning to meet savings goals. If you have a retirement plan that 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.
Planning for Long-Term Care
“Caregivers see first-hand how much long-term care facilities cost,” Mielke says. However, too many caregivers fail to plan for their own long-term care needs. Long-term care insurance (LTCI) is one option that has grown in popularity over the years. LTCI is a type of insurance policy that covers the costs of care services that traditional health insurance does not. This includes coverage of in-home care, care in an assisted-living community or nursing home, and hospice care.
Mielke says the best time to buy long-term care insurance is usually in your 50s. LTCI is pricey, but that’s when the premiums are the lowest. Depending on your health, policies may still be affordable as you get older. Before you buy, know the terms and fully understand the details of the policy you choose. Look at the maximum daily benefit amount and how it compares to average care costs, how long coverage will last, and whether coverage is transferrable between spouses. Be sure to check if the policy takes inflation into account as well.
Finding the Right Insurance Coverage
Another aspect of financial planning is insurance. There are countless types of insurance on the market and some kinds don’t apply to everyone (think pet insurance, motorcycle insurance, etc.). It can be tricky to determine what coverage you actually need because this is entirely dependent on your situation and the amount of risk you are comfortable with shouldering.
In addition to the basics like health insurance, homeowners’ or renters’ insurance, and auto insurance, a life insurance policy is one type of coverage that is commonly overlooked. There are many different options available, such as term or whole life, and finding the right type and level of coverage depends on your personal situation. If you were to pass away, the right life insurance policy can help ease the financial burden on your care recipient and other surviving family members.
Another factor to consider is liability coverage, especially if you have hired caregivers working in your home. Most homeowners’ and renters’ insurance policies feature some level of coverage to protect policyholders from liability if a visitor were to incur an injury on their property. However, increasing this coverage is a good idea to minimize the financial risk of having outside individuals work in your home. This is especially true if you hire private caregivers that are not affiliated with a home care agency.
An umbrella policy is an excellent option in these scenarios as it offers the most comprehensive coverage. “Getting umbrella coverage with your property and casualty insurance 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.
Keep in mind that quality home care companies are typically licensed, bonded and insured and offer workers’ compensation for their employees. These measures are meant to protect both the business, the consumer and the hired caregivers, and these factors are built into the company’s fees. Hiring outside of an organized agency means you are responsible for handling proper payment protocols, tax withholding, workers’ comp, insurance and more.
Legal Documents Are Crucial for Financial Planning
In addition to building financial security, caregivers must have the proper 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, power of attorney (POA) documents indicate who can make decisions on your behalf (and what kinds of decisions) if you become incapacitated and unable to make choices for yourself. A will covers how your estate is handled after you die. These documents work together to ensure your wishes are carried out regardless what happens in life and in death.
Legal documents coordinate directly with financial plans, 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 documents, will, life insurance policies, trusts and any other legal preparations are examined in conjunction with financial planning documentation.
Seek the Help of a Financial Advisor
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.
Keep in mind that 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,” but these professionals are incentivized to sell you their company’s products and services to earn a commission. A better option is to find an independent financial planner that is not tied to a particular financial firm. They do charge a fee for their services, but you are more likely to receive unbiased advice and find the right products for your needs.