How to Factor Family Into Your Retirement Plan

Hashing out a family retirement plan can be overwhelming. That's why it's important to revisit things like timing, saving for kids' college, and caregiving for elderly parents each year.

How to Factor Family Into Your Retirement Plan

Factoring family into your retirement plan—and other aspects of annual financial planning—often calls for significant change. Your retirement plan when you're married, for instance, will look completely different from when you were single. You not only have to consider your own needs and retirement dreams, but you also have to consider your spouse's. Children's college savings, caring for elderly parents, and even helping out extended family members will often have to play into one's retirement goals and how to achieve them.

Let's look at how your family might factor into your retirement plans and how to manage the challenges that come with considering multiple people's priorities.

Finances can change significantly when factoring in family members and key life events. If you have kids or parents who rely on you for support, financial or otherwise, that further complicates your planning.Key challenges or milestones to plan for or address when retirement planning with families include saving for college, caregiving for elderly parents, and the actual timing for retirement.There are key strategies families should undertake, such as funding retirement accounts before education savings and getting long-term care and life insurance for aging parents.When you make an annual financial plan—or update the plans you've already made—you need to review these needs and see what might require adjustments.

Some financial advisors have the following piece of advice: you can get a student loan to go to college, but there's no such loan for retirement. Still, prioritizing a child's education should not be something to feel guilty about, and there are ways to accommodate both goals of college savings and a comfortable retirement later on.

At the same time, adults may find that they suddenly have to care for elderly parents who may have health issues or are unable to properly fend for themselves. Again, there are ways to avoid having such family issues interfere with retirement.

Many parents want to pay for their kids to attend college, but feel the pull of competing financial demands. 'College saving can be a daunting task, especially with multiple children,' says Michael Briggs, an investment adviser representative with NEXT Financial Group at Horizon Investment Management Group in East Longmeadow, MA. 'The advice I give my clients is, when having to choose between college saving and your own retirement, always choose your own retirement first.'

Parents' contributions to their own individual retirement accounts (IRAs) can be used for their children's educational expenses. The annual contribution limit—established by the Internal Revenue Service (IRS)—to both traditional and Roth IRAs is $6,000 for 2022 and $6,500 for 2023. For individuals aged 50 and over, they can deposit a catch-up contribution of $1,000.

On the other hand, if you place money in a 529 plan, it can't be used for non-educational purposes without paying taxes and penalties.

'Just think of being on a plane—they tell you to put your own mask on first and then help the other person. The same applies when choosing where to put your funds,' Briggs adds.

Another benefit of prioritizing retirement savings over education savings is that money in qualified retirement accounts isn't counted as an asset on the Free Application for Federal Student Aid (FAFSA). That means they don't count toward your family's expected financial contribution.

Sharon Marchisello, author of the personal finance ebook Live Cheaply, Be Happy, Grow Wealthy, agrees that funding retirement should be higher on your list than sending the kids to college. Your kids have other options for paying for college—including scholarships, part-time work, and student loans—but you won't be able to borrow your way through retirement.

'You help your children more by being self-sufficient, so you don't have to ask for their support in your old age,' said Marchisello.

Many financial advisors recommend to first plan what you'll be saving for retirement; then see what you might be able to put aside to help with college for your children.

Speaking of caring for parents who aren't financially self-sufficient in their old age, review whether this burden is likely to fall on your family. If the answer is yes, there are proactive steps you can take to defray how caregiving for elderly parents could derail your current and future financial plans.

The U.S. Department of Health and Human Services estimates that about 70% of Americans who turned 65 will need some kind of long-term care services. Long-term care can be financially devastating. According to Genworth's 2021 Cost of Care Survey, a month in a private room in a nursing home, costs nearly $9,034. Imagine paying that expense for months or even years.

It's best to start planning for this before your parents are actually elderly. 'If your parents are approaching age 60 and you can afford long-term care insurance, paying the premium now may save you much more later if a parent needs to go into a nursing home,' says Oscar Vives Ortiz, a CPA financial planner with PNC Wealth Management in the Tampa Bay-St. Petersburg area of Florida.

Ask yourself whether this is the year you need to buy long-term care insurance for any of your parents—or make sure that those parents have purchased it for themselves. For every year that you postpone buying this insurance, you face higher rates based on the insured's increased age; rates can increase even further if health problems develop, or it might become impossible to get insurance at all. If your parents are paying, be sure they keep up with the premiums—sometimes, you can sign up to be alerted if an older person hasn't been paying the bills.

Either life insurance or an annuity with a long-term care component offers an alternative to long-term care insurance that may be more practical for some families.

While you and your spouse are planning for your parents' long-term care needs, you should be thinking about your own as well.

Richard Reyes, a certified financial planner for The Financial Quarterback, says that planning for long-term care can also give you more flexibility in that you won't have to depend on the government, your children, or your neighbors to take care of you; you'll be able to call the shots.

'If you have no care insurance or have not planned adequately for care, then obviously the only flexibility you have is what others have planned for you,' Reyes says.

'If you go on Medicaid, your care will be what the government prescribes it is, and who takes care of you is based on where and when there is space available for you—not a great solution,' he adds.

There are also many problems with depending on the family. Your kids may not live nearby or may have their own issues, concerns, and families to take care of. A spouse you depend on will likely be close to your age and have diminished physical capacities.

'When someone gives me lip about having long-term care, I tell one of the spouses to lie down on the floor and ask the other to pick them up and carry them all around the house and in and out of their vehicle,' Reyes says.

Life insurance with a living benefit or long-term care rider can help pay for long-term care as it's needed. But life insurance can also be a tool for reimbursing family members who help with long-term care after the loved one who needed that care passes away.

'If you feel that you have to spend some of your money taking care of your elderly parents, then try to make sure that any life insurance policies that they have listed you as a beneficiary to repay you and replenish your investments upon their death,' says Rick Sabo, a financial planner with RPS Financial Solutions in Gibsonia, PA.

If your parents don't have life insurance, can't afford it, and are likely to rely on you for help when they're older, talk to them about purchasing a guaranteed universal life insurance policy that you and your spouse will pay the premiums on. Unlike term life insurance, which your parents could outlive, you can purchase guaranteed universal life insurance that lasts until age 121, making it essentially a permanent policy, but at a much lower cost than whole life insurance.

You and your spouse may also want to carry your own life insurance policies. The younger you are when you purchase it, the less expensive it will be. The policy's death benefit could be a godsend if a breadwinner or homemaker passes away prematurely.

People of any age can start establishing retirement goals by thinking about how they want to live during retirement. Saving will be much easier when you know what you're saving for, says Kevin Gallegos, vice president of Phoenix sales and operations with Freedom Financial Network, an online financial service for consumer debt settlement, mortgage shopping, and personal loans.

Think about where you will live, if you will move to a smaller home, whether you plan on traveling, and whether you will want to work part-time. Plan to live on 80% to 85% of your current income once you retire.

To fully understand what your retirement income will be, make sure you understand any pension you're entitled to, review all your investments, and estimate your Social Security income, Gallegos says.

Planning retirement with a spouse is more complicated than planning retirement for just yourself. You'll need to create a shared vision for what your retirement will look like. You'll also need to agree on whether you'll both stop working at the same time or whether it makes sense for one spouse to retire first.

Age differences between spouses are common, and these can create issues in retirement planning. At retirement, if you are 66 and your spouse is 62, for example, you will be able to get health insurance through Medicare, but your spouse won't until age 65. That's an expense of potentially $600 to $700 a month for premiums that you must plan for, Reyes says.

Other issues to sort out include when to claim Social Security, how one spouse's claiming decision could affect the other's benefits, and how to claim pension benefits in a way that will be most beneficial to the spouse.

An alternative to saving money for elder care is to buy a long-term care (LTC) insurance policy. These cover many of the costs of assisted living or nursing care and can relieve the financial burden from children. Life insurance is another option that can effectively "pay back" a loved one upon death for costs incurred in their older days.

Unfortunately, even a life of hard work does not always mean one can afford to retire. While social security can help, often adult children will step up to help. But first, be sure that your parents are living within a reasonable and appropriate budget, and not splurging with the assistance you (and other family members) may be giving.You can also encourage them to keep working, with many employment opportunities now available to people of all ages, including older adults. You can also try to research various government programs at the state or federal level to help defray costs.

Disability can be expensive and emotionally taxing. Thinking ahead and owning a long-term disability income insurance policy can certainly help, as it replaces the income lost due to a disability, sometimes for a lifetime.Depending on the level of disability, you may also want to consider establishing a special needs trust, a legal arrangement that allows you to take responsibility for their finances and have them continue to receive income without reducing their eligibility for the public assistance disability benefits provided by Social Security, Supplemental Security Income, Medicare, or Medicaid.

Annual financial planning for a family requires considering the needs and desires of everyone involved. You need to make strategic decisions about funding your retirement, helping children with their college expenses, caring for elderly parents, purchasing long-term care insurance and life insurance, and timing your retirement and that of your spouse.

If you plan for each of these items and learn about the different options and consequences of each choice, you're less likely to face unpleasant surprises and financial struggles that could prevent you from retiring when and how you want. Once you have a basic plan, review these decisions and expenditures each year to see whether any adjustments need to be made.