When Giving Impacts Your Retirement

Can you be too generous? A recent survey by the Employee Benefit Research Institute (EBRI) found that providing financial support and/or unpaid care to family or friends can affect your retirement savings.
Whether it’s a friend recuperating from surgery or an adult child going through difficult times, you might find yourself providing financial support or care for a short period of time. But what happens when the financial support or caregiving situation becomes long-term? Then it could affect your retirement savings.

According to the EBRI survey, 29 percent of active workers and 20 percent of retirees are currently providing financial support to a friend or relative outside their immediate household. The majority (58 percent) are providing financial support to children age 18 or older.

To prevent financial obligations to family and friends from eating up your retirement savings, consider the following approaches:


•   Save for a child’s (or grandchild’s) college education with a Section 529 college savings plan. A 529 plan has tax advantages to make it easier to save for a designated beneficiary’s college or post-secondary training. Earnings are not subject to federal tax and generally not subject to state tax when used for the beneficiary’s qualified education expenses.

•   Make sure your adult children have health insurance so you don’t have to help them pay for medical bills. You can keep your adult children on your plan until they reach age 26, regardless of their student or marital status.

•   Have a financial planning discussion with your soon-to-be independent (or already independent) adult children. In addition to having health insurance, they should have adequate renters or homeowners coverage, along with auto insurance, if they own a car.

Unpaid caregiving can also take a toll on your retirement savings. Depending on the amount of care you are giving, it could impact your ability to earn a living, and may result in additional costs, such as driving expenses, etc. The following suggestions can help you minimize that financial and emotional impact:


•   Plan for short-term care needs. Financial experts agree that every family should have at least six months’ worth of basic living expenses saved up for emergencies. If you don’t have access to that kind of savings, consider insurance. Accident insurance will pay a benefit if you have an accidental injury. You can use these benefits for anything—including in-home care, if you need it.

•   Plan for long-term care needs. If a spouse or other family member needs long-term care, a long-term care (LTC) policy will help. Many people don’t realize that their health insurance plan and Medicare do not cover purely custodial care for people who can no longer care for themselves. LTC policies usually pay a flat per-day or per-month benefit when the insured person can no longer perform certain “activities of daily living” on his/her own. Those benefits can pay for care in a nursing home, assisted living facility or in the home.

If you might end up with responsibility for the care of older relatives, ask them whether they have long-term care insurance. Although this might be a difficult conversation, having this valuable coverage could make a great deal of difference in the quality and type of care available to them.

•   Protect your income. Becoming disabled can also create a loss of income. If you or another family member cannot work or must reduce work hours due to disability income, disability income insurance can help. This coverage will replace a portion of your lost income if you’re unable to work due to a non-occupational illness or injury. If your employer provides short-term disability coverage (a requirement in California, Hawaii, New Jersey, New York, and Rhode Island), it will most likely begin after you’ve used all your paid sick leave. Short-term disability policies pay benefits for up to six months; long-term disability policies begin paying benefits after your short-term disability benefits end. (If you don’t have short-term disability coverage, your policy will begin paying after an “elimination period” of three or six months of disability.)

•   Have a comprehensive financial plan. If you don’t already have one, please contact us. We can help you look at your financial situation and develop a realistic financial plan that will help you finance a comfortable and secure retirement. For more information, please contact us.