People in their peak earning years may be solidly saving for their kids' college educations and planning for retirement, but they sometimes get taken by surprise with a classic Sandwich Generation scenario: They need to help their parents handle a health crisis.
“An emergency with their parents is unfortunately a common issue with our clients," says Fred Rose, head of credit and liquidity solutions at RBC Wealth Management-U.S. “You know it's coming as they age, but then suddenly it's a fire drill, and your siblings may not be in a position to help, so it falls on you."
Planning for long-term care needs
While planning for failing health may not be something many people want to think about, it may be essential to protect the assets of parents and their adult children.
“Financial planning is meant to provide income and take care of your needs and wants in the future," says Carol Goetsch, senior product manager, annuities and insurance at RBC Wealth Management-U.S. “But it doesn't take long for a $750,000 portfolio to be whittled down if you're paying $15,000 a month for long-term care for a few years."
Nearly 70 percent of people who are 65 today will need some form of long-term care, according to the U.S. Dept. of Health and Human Services. While the costs of those services vary widely according to location and the type of services, the federal government estimates an average cost of $7,698 per month for a private room in a nursing home and $20.50 per hour for a home health aide.
Starting the conversation about potential future health issues may be difficult, especially when it comes to your own health, says Griffin Geisler, a wealth planning consultant at RBC Wealth Management-U.S. But thinking about the topic in terms of your family's health is equally important.
“It's important to make people in their 40s, 50s and 60s realize that helping their parents can impact their own retirement savings," Geisler says.
The benefits of long-term care insurance
A long-term care insurance policy can be an option, particularly for those who have age on their side. The cost of insurance policies is cheaper; however, Goetsch acknowledges very few younger people buy long-term care insurance, unless they have a relative facing expensive health care needs.
“Long-term care planning should be done so you can manage the care for people, and so you don't have to provide the care yourself," says Goetsch.
While traditional long-term care insurance policies have fallen out of favor because of rising premiums, Goetsch says a hybrid long-term care insurance policy can be a good option for some families.
“With a hybrid policy, you make a lump sum payment or pay for it over a few years," she explains. “If you need long-term care benefits, the policy works like any other long-term care insurance policy. But if you don't use the long-term care benefits, the policy has a death benefit for your heirs. So, for example, if you buy it with $100,000, the benefit could be $200,000."
Plan ahead with family members to pay for care
For clients in their 40s and 50s, Geisler recommends a health savings account that can be earmarked for future health care needs.
“If you can build up assets that grow tax-free and let it sit there for 10 or 20 years, that can be another way to pay for health care needs," says Geisler.
When a family member faces an urgent health need or a space suddenly becomes available in a preferred senior housing facility, everyone in the family benefits if there's a way to access funds immediately without the negative consequences of selling assets in a potentially down market, says Geisler.
“Chances are, if the parents haven't done any planning, there will be a cash flow need and the adult kids will have to step in," Goetsch adds. “Not having a plan for care will have serious emotional and financial consequences for the kids."
Borrowing against your portfolio to pay for an emergency
In the event of an emergency, Geisler says, “You and your adviser should look side-by-side from a cost standpoint at a reverse mortgage, a home equity line of credit and a securities-based line of credit."
For example, he explains, moving a parent to a continuing care facility can sometimes require an upfront investment of $200,000 or more.
“A bridge loan from a line of credit can provide that money and then you can repay it when the parents' house sells," Geisler says. “One of my clients did this for their mother when a spot became available fast. This gave them the flexibility they needed."
To open a securities-based line of credit, Rose says, a balance of at least $100,000 in non-retirement assets is typically required. The accounts are simple to open and don't require any fees.
Rose explains that you can generally borrow 50 to 80 percent of your portfolio with a line of credit, but he recommends keeping your total borrowing to under half – usually 25 to 40 percent – of what you could borrow.
A securities-based line of credit is debt that must be repaid, he explains, but typically has relatively low interest rates and requires interest-only payments initially. The rates fluctuate and are based on an index and margin, currently averaging four to six percent.
“For example, if the kids need to pay $300,000 to move their parents into an assisted living facility and they borrow it from their line of credit at five percent, they may have to pay $7,500 in interest over six months until the parents' house is sold and they repay the debt," says Rose.
That's a small expense to pay, he adds, to ensure family is taken care of.
In addition, Rose says, it's possible to roll the interest payments into the debt to reduce cash flow issues. “You're paying interest on the interest but, for example, if your first payment would be $1,250 and you roll it into the loan, your balance is now $301,250 and you're paying an extra $5.21 in interest the next month." While this is not a good long-term strategy, he says, it may provide good short-term flexibility.
A securities-based line of credit can be a useful option in case of an emergency, Rose says, and can help you avoid the need to sell securities in the midst of an emotional crisis, which could disrupt your own retirement plan. But ultimately, the best thing anyone can do is plan ahead for long-term care costs so you don't get surprised when an emergency happens.
“It's always better to be prepared," Rose says.