How To Make Financial Decisions Now

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When you get the midnight call that a loved one needs assisted living care, what do you do? The obvious, first step is to ensure that they receive the care they need. While arranging for this care, you will undoubtedly have to make some difficult financial decisions, and you may be faced with some unwelcome surprises. Where do you start?

1. Obtain Power of Attorney- You will need this legal authority in order to access your loved one’s accounts and financial records. Without Power of Attorney, you will not be able to make any financial decisions and will have to have a court-appointed Conservator named.

2. Put Together a Balance Sheet and Cash Flow Statement-First, create a basic balance sheet. In one column, list the value of their assets, such as their home, stocks, mutual funds, CDs, and retirement accounts. In another column, put down their liabilities, such as outstanding mortgage or car loan balances.

Then, do a cash flow statement. List the monthly income from each of their investments, including reinvested dividends and capital gains, as well as any pension income and Social Security benefits. Finally, figure their monthly expenses, including mortgage or rent payments, utilities, groceries, and medical expenses. After completing these simple statements, you will know exactly where your loved one stands financially.

3. Consider all your options; consult with professionals- The most important concern is that you manage your loved one’s finances so that they can receive quality care for as long as possible. In order to ensure that you are making financially sound decisions, you should consider several options for saving money and redistributing income that are sometimes overlooked. A consultation with a financial professional can help you to more adequately understand the options that are introduced here.

Things to Consider when Managing Your Loved One’s Finances:

Keeping Liquidity Up-It is important that you not exhaust all liquid assets too quickly. Individuals often spend through liquid assets and neglect to consider the lengthy period of time they may have to pay for long-term care.

Managing Cash Flow-This starts with preparing a Cash Flow Statement for your loved one. While considering current income and expenses, you will also need to factor in any additional expenditures that might become necessary in the future because of a need for increased care.

Portfolio Management-During this vulnerable time, it is important that you avoid taking too much risk with your loved one’s portfolio. Although diversification is still important, you should focus on low risk investments. Retirees are often told to gradually shift investments from stocks to bonds and cash as they age. This is good advice.

But, as Howard Gleckman, Senior Correspondent for Business Week, points out, that does not mean you should turn over your entire portfolio in the face of a medical crisis. “We advise people to gradually shift to bonds and cash as they age. But sometimes, when they see a need for costly care, they panic and invest everything in bonds.”

Tax Considerations-Many individuals neglect to file for available tax deductions for medical expenses. Karen Johnson, a Fairfax, VA based CPA, explains, “In order to claim a deduction, medical expenses have to exceed 7.5% of your adjusted gross income. A portion of your monthly rent at an assisted living facility is considered a medical expense for deduction purposes. Considering the costs of long-term care, you may quickly reach the 7.5% limit.”

Using available deductions may help you to offset the taxes incurred from removing funds from your retirement accounts. “When you take money out of a retirement account, it is taxed as ordinary income. However, if you can offset your tax deductions against this taxable withdrawal, it may make financial sense to take money from a retirement account sooner rather than later,” notes Thomas West, a Financial Planner in McLean, VA.

A family facing long-term care costs might overlook this tax-sensitive funding technique. But “offsetting the retirement account withdrawal with medical deductions is not always the best thing to do. You have to look at all of the assets,” Johnson and West agree.

Using Capital Gains and Dividends from Investments- Re-investing capital gains is typical for younger investors. However, cash flow needs change dramatically as individuals age. “When you are faced with a situation where your expenses are increasing, you can use the dividends and gains from mutual funds to increase your cash flow,” says Gleckman, who goes on to point out that this source of income is easily overlooked.

Increasing Distribution from Retirement Accounts- Once an individual is 70, they are required to take a minimum distribution from their retirement accounts. However, the distribution amount can be easily increased over the minimum to cover the costs of long-term care. Also, as mentioned earlier, taxes on this additional income could be offset by medical expense deductions.

Reverse Mortgages-Using the equity your loved one has in their home is also an option for financing long-term care. Please see our article entitled “Reverse Mortgages: Myths and Misperceptions” for more information about this unique loan option.

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