Protecting a caregiver’s retirement savings

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Staying home or cutting back hours to raise children or to tend to an aging parent is a loving and noble thing to do. But it’s also expensive.

It’s not just income you’re losing. Retirement benefits — from employer-sponsored savings to Social Security — take a hit as well. If you’re married, a working spouse must work extra hard to make up funding gaps, while an at-home spouse puts his or her financial future at the mercy of others. At the same time, you may be digging deeper into your wallet to cover health care costs and other expenses.

What to do? No one can or should tell you what’s best for you or your family. But it’s imperative to make a fully informed choice that considers the financial ramifications of caring for children full time or taking on the responsibility of looking after an older relative, says Cindy Hounsell, executive director of the Women’s Institute for a Secure Retirement.

“I understand there are emotional reasons, but you have to understand you’re making a serious, life-defining decision, too,” says Hounsell.

First, here are some statistics to mull over. Median income in a household where someone is caring for an older parent or an individual over the age of 18 is just over $37,300. That’s far lower than the $42,400 median for households without a caregiver, according to research by AARP and the National Alliance for Caregiving.

That same study found that among caregivers who do work, 57 percent arrive late, leave early or take time off during the day to look after someone. One out of 10 switches from a full-time schedule to part-time work. Five percent lose job benefits. Four percent turn down promotions.

A woman who quits to care for someone will lose $659,139 in wages, pension and Social Security based on an annual salary of $35,000, according to the National Alliance for Caregiving.

Of course, opting out of work has ripple effects that impact the entire family. A married couple will have to rely on reduced retirement savings when one spouse stays home. A widow who raised children at home may need to rely on them when her own nest egg runs out. The unmarried sibling who scales back work hours to tend to an older parent may not have anyone to help pay the bills.

Grim scenarios like these make it all too easy to ignore the future. But here’s some encouraging news. It’s not impossible to make up ground and to minimize the impact on your retirement, should you decide to take time off or scale back on work to care for loved ones.

7 ways for caregivers to tend their nest eggs
  1. Pay attention to that 401(k).
  2. Fund a spousal IRA.
  3. Remember vesting.
  4. Plan on working longer down the road.
  5. Make up for lost ground.
  6. Safeguard existing savings.
  7. Turn parents into a deduction.

1. Pay attention to that 401(k).

Sure, you’ve left work and no longer contribute to one of these nifty plans. But your spouse still does. How much does he — or she — contribute? Since you’re both going to rely on that nest egg in the future, make sure your spouse funds the plan to the maximum. The switch from a dual-earning family to one that’s supported by a single wage earner may make it more tempting to scale back contributions than boost them. Don’t relent. Scour your budget and find ways to increase contributions gradually over time.

2. Fund a spousal IRA.

Just because you’re not working doesn’t mean you can’t put away something in a tax-friendly retirement plan. A spousal IRA is just a fancy way of saying contributions can be made in your name to an IRA of your choice, but you’ve got to be married to do this and you may have to meet certain income eligibility requirements depending on the IRA you pick.

This year, you can stash up to $4,000 into an IRA (with an additional $500 for individuals over 50). Doesn’t sound like much? Think again. Let’s say a young mother has $4,000 put into a spousal IRA every year for eight years while she takes time off to raise young kids. If the money earns 8 percent annually, there’d be $45,950 by the time she went back to work. If she left the money untouched and that $49,950 continued to grow at an average of 8 percent annually for 30 years — say until she was ready to retire — the IRA would be worth $462,379.

Impressive, right? Yet the potential value of spousal IRA is too often overlooked, says Ed Slott, a CPA and editor of the Web site “If a couple has the money to do it, they should open one. Otherwise, they’re giving up an opportunity to build up retirement accounts,” says Slott.

If you do opt to open an IRA, make sure you follow through and fund it. Arrange to have deposits automatically made into the plan each month. You’ll be less likely to miss the money coming out of your day-to-day budget if you put savings on autopilot.

“When you take time off, you’re putting all your eggs in somebody’s basket, so you need to be sure there will be money there when you need it,” says Hounsell. “If you’re going to make the decision to stay home, and your spouse isn’t willing to fund a retirement plan for you, maybe you need to rethink it.”

3. Remember vesting.

Often, you may not have a choice about leaving work. But if you’ve been at your employer for a while, and plan to leave to stay home with a child or parent, first be sure you aren’t squandering valuable retirement benefits.

Most companies have vesting periods, the time period you must be employed before you qualify to keep 100 percent of employer contributions that have been put into a 401(k), 403(b) or other plan on your behalf. Ditto for pensions. If working a few more months before you leave to care for loved ones means keeping more of your pension or 401(k) balance, it may be well worth it to stay, says David Wray, executive director of the Profit Sharing/401(k) Council of America.

“The typical vesting schedule in a 401(k) plan is a five-year graduated schedule, which means you vest an additional 20 percent a year of the company contributions. In a traditional pension plan, you basically have to work for five years before you qualify for benefits,” says Wray. “So clearly, if you’re in a traditional pension plan or a 401(k) and you can work six more months to be there five years and qualify for the entire benefit, it’s worth it to stay. But I think many people find it hard to pay attention to these kinds of issues when they’re facing more immediate challenges of caring for family members or changing a job.”

4. Plan on working longer down the road.

It’s not an option that’s going to make you smile, but working extra years will directly impact the size of your future Social Security check. That’s because Social Security benefits are based on your highest 35 years of earnings. Years you earned nothing because you were at home would be included in this calculation unless you replace them with working years.

Another option? Consider scaling back to a part-time schedule so you can have some earnings for your Social Security calculation. Another reason to keep working outside the home is that it will help keep your skills sharp and your resume current, making it easier for you to find work once you’re ready to go back full time.

5. Make up for lost ground.

If you’re re-entering the work force after taking time off to raise a family, immediately begin contributing to a retirement plan. And if you’re 50 or older, take advantage of catch-up provisions that let you save more in IRAs and employer-sponsored plans like a 401(k).

Individuals who turn 50 in 2007 can save an extra $1,000 in an IRA for a total of $5,000. And employees who’ve reached 50 by year’s end can put an additional $5,000 into a 401(k), or up to $20,500.

That can help you make up a lot. For example, a 50-year-old who makes the full 401(k) plus catch-up this year, and keeps doing it until she’s 70½, when she must start taking withdrawals from the account, will amass about $1,064,000, assuming assets grow at 8 percent annually. That’s roughly $247,000 more than what she would have saved over the same time period if she had not taken advantage of the $5,000 catch-up.

6. Safeguard existing savings

. Nothing like leaving work to put a crimp on the wallet. That’s all the more reason to create a budget and stick to it. Likewise, resist all temptation to raid the assets you amassed from the days when you were working.

Gail Cunningham, a counselor with Consumer Credit Counseling Service in Dallas, says she’s worked with clients who’ve done huge financial damage by raiding retirement savings when they had no other income as an at-home spouse. “People take the 401(k) and use it on their home to redo a kid’s room or a kitchen. That isn’t a good choice,” she says.

7. Turn parents into a deduction

. If you are spending big money to care for an aging parent who doesn’t have much income, or who’s primarily relying on Social Security to get by, it might be time to claim them as a dependent.

To qualify, a parent’s individual’s gross income can’t exceed $3,700. But he or she doesn’t have to move. That’s because the tax code “doesn’t require they be in your home to be a dependent,” says Mark Luscombe, principal tax analyst at tax publisher CCH.

If they do qualify for dependent status, there are additional potential tax breaks. Money you’ve spent on medical costs — and this includes expenses for anyone in the family who’s dependent on you, as well as yourself and your spouse — can be used as a tax deduction if those health care expenditures exceed 7.5 percent of your adjusted gross income in any given year.

If costs don’t meet this threshold, look to other tax-saving options, such as flexible spending accounts, or FSAs. Offered by employers, they allow you to set aside pretax dollars from your salary for such things as unreimbursed prescriptions, doctor co-payments, even a wheelchair ramp or other medically necessary improvements you add to a home. (For a complete list of eligible expenses, go to the IRS Web site,, and download Publication 502.) You get reimbursed from your FSA after you spend out-of-pocket funds and submit a receipt.

Finally, don’t overlook the child- and dependent-care tax credit. It can apply to a parent who’s “physically and mentally incapable of taking care of themselves, but they have to be in the same home as you for more than half the year,” says Luscombe. This year, the credit for one dependent tops out at $1,040, subject to factors including your tax bracket and out-of-pocket expenses.

Break the rules. Talk about money. These days, a fifth of baby boomers age 45 and older provide financial support for their parents, paying on average $240 a month, according to one study by Putnam Investments. Those gifts don’t come cheap. In fact, 44 percent of individuals who are bankrolling an older parent say they’ll have to work during retirement as a result.

If you’re likely to care for mom or dad, be prepared to do so. That means sitting them down for a heart-to-heart.

“You’ll never look at your parents as an expense, but from a financial perspective, you have to ask ‘Are they OK? Did they save enough?'” says Dick Bellmer, chairman of National Association of Personal Financial Advisors. “I know talking to your parents about money is impossible for most people. You might as well ask how many times they made love last week. But try to have that conversation with them.”

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