Seven Planning Challenges for Caregivers
By Paul Peeler
The economist Thomas Sowell once said, “There are no solutions. There are only trade-offs.” He easily could have been describing the financial planning process for parents and caregivers of individuals with a late-onset severe mental illness, or SMI. One in twenty adults in the U.S. deal with a serious mental disorder. Those that care for them function as advocates for their loved one while at the same time attending to the heightened complexity of their own financial affairs.
Paul Peeler
Understanding the additional dynamics that parents and caregivers face can help them make more informed decisions for themselves and their families.
Seven Dynamics to Consider for Caregiving
Compressed Timelines: Late-onset SMI often occurs in the parents’ prime earning and saving years. Most individuals have utilized a decades-long investment strategy through their employer-sponsored retirement plan that did not anticipate an outlay of tens or even hundreds of thousands of dollars to provide for the care, treatment, and maintenance of their loved one.
Due to the timing and expense of meeting the needs of an SMI loved one, the caregiver and/or parents face an impossible choice: To what extent do they use their assets to fund costs for their child, and at what cost to their own financial future?
What you can do now: Create a plan.
If you have never created a systematic financial plan before, now is the time to do it. Reconsider your cash flow assumptions, insurance needs, investment strategies, and estate planning. The Special Needs Planning Guide by Nadworny and Haddad and When Mental Illness Strikes by Allen Giese can be useful resources.
Increased Expenses: Per the Circle of Care Report published jointly by the National Alliance for Caregiving and the National Alliance on Mental Illness, 49% of SMI loved ones are financially dependent on their caregiver(s). This extended financial dependence often begins around the time the parents were expecting to become empty nesters and that their child-related expenses would decline. These unexpected expenses can have a profound impact on the longevity of the family’s retirement assets.
What You Can Do Now: Make hard choices.
This is what it comes down to: Every dollar you spend on the maintenance of your loved one is a dollar that will not be available for your own maintenance and support during your own retirement. Consider these trade-offs now rather than in the fog of crisis and emotion. Write them down. The decisions you make during sober reflection will reduce your chances of making crippling financial decisions later.
Multi-Generational Planning: Traditional financial planning assumes funding for the lifetime capital needs of one generation. This means that a couple is usually planning to meet the income requirements through the death of the second spouse, and a single individual is usually concerned about funding through their lifespan alone.
An adult child with an SMI expands these requirements. Often SMI parents and caregivers have the desire to provide funds for the child’s ongoing maintenance after the parents’ death. This increase in the ultimate capital need often comes at a point in their life when they are approaching the “home stretch” before retirement, leaving them without substantial time to make up ground, which can stress even the best laid financial plans. Additionally, couples can struggle in coming to agreement on acceptable trade-offs when choosing how to deploy funding to meet these needs.
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Increased Risk Exposure: Increased lifetime expenditures and end-of-life capital needs bring with them increased risk exposure. SMI parents and caregivers often utilize life insurance to meet the expanded end-of-life capital requirements. In doing so, they face navigating the appropriate balance of face amount, premium, and structure – especially since the policy must be in-force at the caregivers’ passing.
A loss of income due to an injury or illness would be devastating to most SMI parents or caregivers. For this reason, they face the necessity of ensuring that their existing disability insurance coverage (usually through their employer) is adequate in amount and definition of disability.
SMI parents also face the prospect of, in old age, spending assets for their own long-term care costs that overwise are for their loved one’s capital needs. Many caregivers consider long-term care insurance coverage but find themselves weighing the often-substantial premium cost against other needs.
Reduced Bandwidth: Care and oversight of an SMI adult child extracts time and emotional energy. This notion is reflected in the findings of Caregiving in the U.S. 2015, where 79% of respondents reported that their caregiving responsibilities were stressful or very stressful. These time and emotional requirements may not be constant and might ramp up and down over time. At the same time, parents and caregivers may not feel they have the time or emotional resources to put toward their own personal financial planning.
What you can do now: See a pro.
Multi-generational planning can be complex, even for the most capable of financial DIY’ers. A fee-based fiduciary professional utilizing sophisticated modelling software can provide clarity around your situation, illustrate the trade-offs of specific planning, insurance, and investment strategies, and help you make a more informed planning decision. A competent planner will also ensure the planning process remains on track, even when life’s circumstance lobs a curveball.
Moreover, finding a planner with experience in this arena will ensure you are working with someone that understands the planning nuances that you face.
Increased Estate and Legal Complexity: SMI parents also face heightened complexity in the estate planning process. Simple wills are simply inadequate to ensure the desires and intent of the caregivers – much less protect the interests of the child.
As it may not be advisable for the child to have decision-making authority regarding assets, a trust is an effective tool to utilize in SMI-informed estate planning. However, just this process can add wrinkles: Who will serve as trustee? Does this person know the child and understand the dynamics of an SMI situation? Are they young enough to serve for a long time, and if so, do they have the experience to be savvy enough to administer the trust for the benefit of the child?
If the child is receiving needs-based government assistance, a traditional trust arrangement will most assuredly disqualify the child from assistance. Therefore, the parents must take care to work with an experienced special-needs attorney to set up a special needs trust.
SMI parents should also identify an individual (or advocate) who will provide oversight and maintenance of the loved one after the parents’ death. They should draft a non-binding Letter of Intent, providing the advocate context regarding medical care, social interaction, employment, housing, finances, employment, and the like.
For SMI parents who are also business owners, the complexity ratchets up further. Without proper legal preparation, the child could find themselves the unintended owner or co-owner of the business with legal decision-making authority. Yikes!
What you can do now: Consult a special needs planning attorney.
This is an instance where the lawyer who drew up your simple will just won’t do, unless that lawyer also happens to specialize in special needs planning. An experienced special needs attorney will understand the complications of assets and income regarding your loved one as they relate to needs-based assistance.
What you can do now: Create a letter of intent.
Someone will be looking after your loved-one after you are gone, either by design or default. While not legally binding, a letter-of-intent is an invaluable method of getting your accumulated knowledge and understanding of your loved one’s needs out of your head and onto paper to be along to the next caregiver. The Special Needs Planning Alliance has a helpful resource that can get you started.
Work Dynamics and Potentially Reduced Income: Caregivers may choose to reduce their workload by going part-time or by leaving the workforce altogether. While certainly helpful in freeing up time, this strategy reduces household income at precisely the time when health-related expenses may be increasing. Even for those remaining in the workforce, the focus and attention an SMI loved one requires decreases the opportunity for raises and promotions down the line. Indeed, studies show that 50% of caregivers report arriving late, leaving early, or missing work to provide care. This “phantom expense” impacts the family in foregone current income, reduced employer contributions to retirement plans, and Social Security earnings.
What you can do now: Communicate with your employer.
Speak with your manager or supervisor and tell them your situation. Let them know the constraints that you face. The goal here is not to elicit sympathy, but to create context around the potential for unscheduled absences, tardiness, or even needing to miss work-related social events. An employer in-the-know may prove to be more understanding and helpful than an employer kept in the dark.
Late-onset SMI can stress even the most diligently constructed retirement plan, but it does not have to wreck it. By understanding these dynamics as a series of trade-offs, families and the professionals that serve them can position themselves for better long-term outcomes for all parties.
About the author: Paul Peeler
Paul Peeler is an Atlanta-based financial advisor (PlanLifeNow.org) with Integrated Financial Group, and director of The Preparedness Project (PreparednessProject.org).
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