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How to Make a Retirement Plan with Your Family in Mind
by
JG Wentworth
•
January 25, 2023
•
8 min
The information on this blog is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.
As they get closer to retirement age, Gen Xers find themselves with more financial responsibilities than previous generations. Many are balancing saving for retirement with the increasing costs of raising a family and the hefty price of caring for their aging parents.
In fact, AARP has found that 20% of Gen Xers believe they’ll never be able to retire at all—let alone retire while caring for their parents and their kids. And if it’s this bad for Gen Xers, it’s likely not going to get much better for Millennials and Gen Zers.
All of this leads to a set of circumstances that are less than ideal for anyone planning for retirement. If you’re starting to plan for retirement and have family that could depend on you financially at some point, there are a few things that you can start doing now to offset the effects of the staggering retirement savings crisis.
Related Article: 4 Shocking Facts about Gen X’s Finances
Saving for your kids’ college tuition
If you envision your kids going to college, you’ve likely been told to save as much as possible for their tuition to keep up with increasing tuition rates. But in the current economic climate, with retirement looking like a near-impossible dream to many, saving money for your kids’ college plans while ensuring the longevity of your own wealth is much easier said than done.
As a parent planning for retirement, if you find yourself torn between putting money aside for retirement versus saving for your kids’ education, it’s important to know what options are available to you to make the most of your savings.
Pros and cons of 529 college plans
There are specific tax-deferred college savings funds called 529 plans that allow you to grow your college savings over time and take tax-free withdrawals for qualified education-related expenses like tuition, room and board, fees, and so on.
These plans allow you to pay current tuition rates for future tuition expenses—meaning you’re essentially paying for college at a lower rate by using your 529 funds.
However, a huge con is that you have to pay taxes on the fund if you make non-education related withdrawals, so if your child decides not to go to college, you (and your child) will end up losing a lot of those savings and investment earnings to taxes.
In short, these plans definitely have their advantages, but as with any type of investment account, there are risks (and taxes!) involved.
Using IRAs to save for college
Remember: while your kids can take out loans for college, you can’t take out loans to retire.
Of course, if you can help it, you’d rather not saddle your kids with college debt, and 529 plans are a great way to avoid that at least partially. But if you have to make the choice, you may find that saving for retirement over saving for your kids’ tuition allows you more flexibility.
If you’re not sure whether your kids will go to college or are struggling to save for both college and retirement, putting your money into an individual retirement account (IRA) could be a solution. That’s because your IRA funds can be withdrawn to pay for your kids’ college expenses—and if you have a Roth IRA specifically, you won’t have to pay taxes on distributions (even for investment income!).
It’s worth considering, too, that money set aside in retirement funds is not considered an asset when applying for financial aid for colleges using FAFSA—meaning you won’t be required to pay more for college out of pocket because of whatever amount of money is in your IRA.
Basically, if you know the loopholes, you can get creative with your kids’ college savings options in ways that benefit you, too!
Supporting your parents while saving for retirement
Unfortunately, many Americans in their retirement years didn’t count on not being able to rely on Social Security to live during retirement, and pensions are practically a thing of the past for most. That leaves a lot of seniors at risk of running out of money during retirement. For many, their kids will have to pick up the slack—but many adult children don’t have the funds.
In fact, a 2022 study from American Advisors Group found that 55% of Gen Xers aren’t financially prepared to care for their aging parents during a time of need.
So how can you help your parents when you’re planning your own retirement?
Establish expectations and boundaries
The best way to start planning is to have a conversation.
How much money do your parents have available to them? Do your parents expect you to help them pay for both essentials and nonessentials? Will they stay with you or a sibling, live independently, or move into an assisted living facility—and who will pay for what?
Reversing the parent-child roles might seem awkward at first; it’s difficult to adjust to establishing expectations and boundaries for a parent’s finances, and it may require a lot of effort just to broach the conversation.
But if, for instance, you’re dealing with a parent who has a problem with overspending, it’s best to start establishing early on exactly what expenses you’re willing and able to support—and when it’s time to start enforcing the boundaries, make sure you actually stick to them!
Look into government assistance programs
Although there is undoubtedly a crisis unfolding around the care of older generations of Americans, there are some government assistant programs to offset these issues.
Medicare offers help with the costs of medical care, prescriptions, and insurance, with different allowances from state to state. The U.S. Department of Housing and Urban Development (HUD) has also compiled resources seniors can take advantage of, such as housing counseling, reverse mortgages, public housing, and ways to report housing discrimination.
And of course, many states offer food stamps, utilities assistance, property tax relief, and more. You can check the options available in your state using this tool from the U.S. Administration on Aging.
Help is available, and while they may not always be perfect solutions, they can help your parents live comfortably through their retirement years.
Long-term care insurance
A 2020 survey conducted by the Employee Benefit Research Institute found that a whopping 49% of people aged 55 and above say they won’t be able to afford long-term care (like a nursing home or home care) if they need it during retirement.
According to the U.S. Department of Health and Human Services, there’s about a 70% chance that someone turning 65 today will need long-term care at some point—and 20% will need it for more than five years.
So what can you and your parents start doing now to ensure they can afford care? Long-term care insurance is one viable option.
Long-term care insurance is a type of insurance that you can purchase on your parents’ behalf or that they can purchase themselves. The sooner you can purchase this type of insurance, the better; rates increase based on the insured person’s age.
Lowering your debt for retirement
If one of your main obstacles to saving for retirement while caring for your family is an overwhelming amount of debt, you might be considering bankruptcy as an option.
However, bankruptcy is usually considered a last resort, and with good reason—it can stay on your credit report for seven to 10 years.*
Thankfully, there are alternatives to bankruptcy that could help you cut down your debt and pay it off much faster. JG Wentworth offers debt resolution services to help people eliminate their unsecured debt and get a fresh start. If you’re interested in hearing how the Debt Resolution Program works and if you qualify, give us a call today at (888) 505-1794!**
Sources cited
- Khalfani-Cox, L. (n.d.). Financial facts about Generation X. AARP. Retrieved from https://www.aarp.org/money/credit-loans-debt/info-2015/gen-x-interesting-finance-facts.html
- Kagan, J. (2022, December 24). 529 plan: What it is, how it works, Pros and Cons. Investopedia. Retrieved from https://www.investopedia.com/terms/1/529plan.asp
- Investopedia. (2022, November 11). Individual retirement account (IRA): What it is, 4 types. Investopedia. Retrieved from https://www.investopedia.com/terms/i/ira.asp
- American Advisors Group. (2022, October 14). Three in four Generation X adult children want their parents to retire in the comfort of their own home. PR Newswire. Retrieved from https://www.prnewswire.com/news-releases/three-in-four-generation-x-adult-children-want-their-parents-to-retire-in-the-comfort-of-their-own-home–301649118.html
- U.S. Department of Health and Human Services. (2020, February 18). How much care will you need? Administration for Community Living. Retrieved from https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
- Employee Benefit Research Institute. (2020). 2020 retirement confidence survey summary report. Retrieved from https://www.ebri.org/docs/default-source/rcs/2020-rcs/2020-rcs-summary-report.pdf?sfvrsn=84bc3d2f_7
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