Several years ago, the first wave of baby boomer retirements triggered speculation about the unprecedented wealth transfer that was to come. Some projected $20 trillion would be passed down to baby boomers over the next 20 years, but what was supposed to be the largest distribution of wealth in our country's history may turn out to be the biggest non-event since Y2K. It appears many boomers are now financially supporting their aging parents, something that will have major implications on the boomer community, and in turn, their financial advisors.
A number of factors play a role in limiting this inheritance boom, including longer life expectancies, increasing health care costs and rising long-term care expenses. UPI and The Kaiser Family Foundation report health care premiums rose 78 percent from 2001 to 2007 and the MetLife Mature Market Institute reports the average annual cost of a nursing home at almost $70,000. What does this stratospheric rise in retirement costs mean? More and more aging parents are relying on their boomer children for financial support. This is leading to what economists describe as a "negative inheritance," which occurs when an adult child incurs expenses for the care of their parents that surpasses any inheritance they may eventually receive.
While this isn't good news for boomers expecting to receive a large inheritance, it does pose a valuable opportunity for advisors to meet with boomer clients to better prepare them, and their parents. Financial advisors can play a key role in helping adult children support their aging parents while minimizing their financial burden.
As an advisor, one way to ensure your client's financial plan stays on track is to regularly monitor their contributions to their 401(k)s, IRAs and other tax-deferred savings plans. The old adage, "pay yourself first" should continue to be the first order of business. You should also encourage your clients to consult with you before dipping into their savings to pay for any of their parent's living or health care-related expenses.
Since protecting your clients' financial well-being in this situation can be challenging it's important to serve as a bridge between your clients and their aging parents. One approach is to meet with both sides together and have an open and honest conversation about how the aging parents want to live their lives and what legacy they'd like to leave behind. Parents may be reluctant to share financial information (even with their own children) so you'll need to explain how this will meet both of their needs without financially burdening their children.
Another important item to discuss is how to locate important personal and financial documents to avoid confusion down the road. Offer to gather and create a file that includes the parent's documents so they are easily accessible in case an emergency occurs.
Initiating this conversation can also open the door to potential new business, since your clients' parents may need a comprehensive financial plan of their own. Reviewing their financial situation can shed light on potential shortcomings and offer you the opportunity to lend your expertise on topics such as health/life insurance, annuities and even reverse mortgages to help set them on the right course.
Supporting an elderly parent does not have to jeopardize your clients' long-term financial goals, but it's important to understand the implications this can pose and to address it early on. By continually meeting with your clients you can work together to develop a plan that minimizes this financial burden and ensures consistency of your clients' financial goals.
Lauren Coulston is assistant vice president and program manager of educational initiatives with OppenheimerFunds.