Women often take on the caregiving role for children, or aging parents and spouses. 16.8% of the U.S. adult population provides unpaid care to an adult over the age of 50, according to a recent survey—61% of those caregivers are women, and many were unprepared for all that role entails, experts said.
Caregiving may be seen as a family obligation, but the financial hardship is often a surprise. "Most of us are aware of this possible role, but rarely do we prepare for it financially, " said Chrisanna Elser, financial planning quality assurance specialist at BOK Financial®.
Elser offers tips on what to consider if you are anticipating a caregiving role now or in the future.
1. Prepare yourself early in life for a future caregiving role
"We encourage our clients to prepare for life's contingencies," said Kimberly Bridges, director of financial planning at BOK Financial. "This includes the potential for being called upon to provide care for a family member—which could necessitate the need to step down or step away from your job—or to provide funding for care so you can stay attached to the workforce."
Maximizing earnings and savings in your early working years is the best way to shore up a financial reserve for any of life's curveballs, but is especially important if you will be taking time out of the workforce, Bridges said. Compound earnings will continue to work for you even while you step away from your career and are not actively contributing to your savings and investments.
"We have this conversation with clients—especially women since they tend to take on the caregiving roles more frequently," Elser said. "The discussion revolves around the potential of them having to stop working early or potentially take a lower paying job while doing part-time hours as the caregiver for a friend or family member."
2. Involve parents, siblings and spouses in your plan
Work with family members and create a care plan. If you're going to be the one to provide care for an aging parent either because you're willing to take on that role or live the closest to them, there needs to be a plan to compensate for your time, Elser said.
"More often than not, the daughters take on that role. Then they deal with the fallout of lost earnings and savings later, " said Elser. "But we need to start having these conversations. The caregiver may be willing to take on the responsibility, but they need reimbursement because they're hindering their own earning potential—and possibly sacrificing their future financial security—to provide that care. "
One client Elser worked with created a caregiving arrangement with her two sisters. The sister providing care for their mother was paid a reasonable market rate for her services from their mother's assets. The sisters accepted that their potential inheritances would be reduced, but this was the equitable way to handle the arrangement and compensate the caregiving sister for her time and lost earnings. It also removed some of the guilt the other two sisters (who lived in different states) felt for not being there to share in the caregiving duties.
"It's important for parents to realize that if they're not paying a family member, they will likely have to pay for outside caregiving help," Elser added.
Some caregivers worry about spending all of the parents' assets on their long-term care and think they are helping by not asking for compensation, Bridges said. "But if there is a likelihood that the parents will end up on Medicaid, it is better to compensate family members first, rather than have remaining assets go toward medical and caregiving bills that would otherwise have been paid by Medicaid."
3. Don't pull from your own money to cover caregiving expenses
"One of the biggest mistakes children make is spending their own assets on their parents' care when the parents' money runs out," Bridges warns. "Generally speaking, you are not obligated to pay for the care of a non-spouse relative. If you cannot do so without impacting your own financial security, it is better to apply for Medicaid than to spend your own assets."
However, Bridges cautions to learn whether your state has filial responsibility laws first.
"The good news is that some costs of care—including payments to the caregiver—can be covered by insurance if the individual needing care planned ahead. If you are the likely caregiver in your family, it is important to discuss this with your financial advisor before it is too late," Bridges said. You may be able to work with your parents to put proper long-term care insurance coverage in place.
4. Spousal planning for raising families
While the cost of daycare feels pretty steep when children are young, there are more factors to consider when thinking about taking time away from the workforce than simply comparing those costs to the parents' income, said Elser.
"Families need to factor in the true cost of the decision—which includes lower lifetime earnings, lower retirement savings and reduced Social Security benefits," Bridges said, emphasizing that understanding that bigger picture is key.
"Couples are often not factoring in the true lifetime cost of those lost earnings and benefits—which can be very high if the caregiving spouse is a high earner," she said.
And if the decision is made to have one spouse step away from the workforce, the working spouse should fund a spousal IRA on their behalf. Work with your financial advisor on how to set this up and be aware of IRS contribution limits for retirement accounts.
Caregiving for a loved one can be an emotionally-charged role, but it doesn't have to be a financial hardship. Put a financial plan in place early, before the caregiver has to take on the role. Talk to a financial advisor about what kind of contingency planning makes sense for you and your family.