Maria Hudgins was heading into the retirement homestretch when she suddenly found herself starting over. The Houston grandmother assumed responsibility for her toddler granddaughter as the girl’s father—Hudgins’ son—battled drug addiction and the girl’s mother died of a drug overdose.
“It was scary,” Hudgins says, especially because her husband died just a month after she became the 2-year-old’s caregiver. “I re-evaluated everything. I now look at my portfolio and say what is it going to take, not just for me to retire, but also to get my granddaughter through college.”
Where to retire comfortably
Hudgins, now 55, is one of roughly 2.6 million grandparents who are the primary caregivers for grandchildren in the U.S., according to Generations United, a nonprofit intergenerational advocacy group. Though the trend isn’t new, there are differences from past periods where grandparents were taking full care of their grandchildren.
“What’s different now is that the children grandparents are raising seem to be more likely to have special needs and been through trauma—born drug-addicted, haven’t had a lot of stability or have chronic health issues and learning disabilities,” says Amy Goyer, AARP’s family and caregiving expert.
In a Generation United survey of programs across the U.S. that primarily serve grandparents raising children outside of the foster-care system, more than 70% identified opioids as one of the most common types of drugs affecting families. The trend led to a bipartisan federal law, the Supporting Grandparents Raising Children Act, to create a task force to develop and distribute information to help grandparents navigate the school system, plan for the families’ future, and build social and support networks.
Becoming a parent again isn’t one of the unexpected expenses discussed with near-retirees, but the situation brings numerous challenges—emotional, physical, and financial—that should be accounted for in the retirement-planning process.
Before she assumed care for her granddaughter, Hudgins had been investing steadily and was working full time at an engineering firm. After she took responsibility, she hired a live-in aide and continued working full time. That left her in a better position than other grandparents thrust into this position who have already retired and are living on a fixed income.
“Maybe I can retire at 65 or 67, depending on how the market does. If the market crashes, I can’t,” she says. “I have diversified beyond the stock market to buy properties that can create some income for my granddaughter if something happens to me.”
Beyond the emotional strain of dealing with their own adult child’s death or addiction—and the physical demands of raising a young child—grandparents also have to navigate a web of legal, tax, and financial considerations at a crucial juncture in their retirement savings arc. About 40% of these grandparents are over the age of 60 and a quarter are disabled, according to Generations United.
“Many grandparents are taking this on as they are nearing retirement and in strong earnings years that drive incremental Social Security benefits for themselves and let them put the money away in the last few years before retirement,” says Rob Stern, a wealth strategist at RBC. “When you couple cutting back on their earnings power, if they stop working, with the financial responsibility of caring for a grandchild, they could be setting themselves up for failure.”
Here, financial advisors and family law and caregiving experts share their tips on what grandparents should consider if they find themselves in a parenting role again.
Legalize the arrangement
While many grandparents informally take over full-time caregiving responsibility for grandchildren, legalizing the arrangement is important to get control over the child’s life.
In some states, for example, the child can’t be registered for school near the grandparents’ home if they don’t have legal guardianship. Or grandparents may not be able to get the child’s medical records from a pediatrician or put them on their employer-provided health insurance.
Formalizing the relationship comes with an array of complexities, with rules varying by state and the arrangement potentially creating ramifications from a tax and benefits perspective.
Adoption is one option, but it can be the most arduous process if either of the child’s parents are still around as it requires terminating parental rights. However, if a child is adopted, she would be eligible for a Social Security benefit on her grandparents’ work history.
Legal guardianship is the option most grandparents choose if the child’s parents are still alive, financial advisors say. That grants them the ability to control decisions for the child but doesn’t strip their adult child of parental rights.
Grandparents who become legal guardians can also claim the child as a dependent and get some tax relief, though they should assess the pros and cons.
Steven Loeb, an attorney at Chiesa Shahinian & Giantomasi in West Orange, N.J., says he often consults with financial planners, insurance specialists, and care managers when considering guardianship arrangements. For example, claiming a child as a dependent can affect things like financial-aid calculations for college and possibly benefits the child may have been eligible for on her own, like Medicaid. Special-needs assistance typically isn’t affected by guardianship decisions.
Getting guardianship can take a while, especially if an adult child or another relative is contesting it. But grandparents can often go to probate court and get temporary guardianship in a matter of days if a child is in danger, says Anita Ventrelli, senior partner at Schiller DuCanto & Fleck in Chicago, which focuses on family law.
The years just before and after retirement can play an outsize role in how long savings can last, with early one-off expenses or a market downturn significantly denting a nest egg’s durability. Child-rearing isn’t just a one-time big expense but one that adds up over time, with the average estimated cost of raising a child to the age of 17 at about $234,000—before considering college or any special needs.
For those who have retired with ample savings, their new role means adjusting withdrawal rates, portfolio allocation, and spending plans to accommodate expenses and the need for the portfolio to last even longer since it will now be supporting a younger child.
Grandparents may want to increase their “safe” bucket with relatively liquid assets for near-term expenses to cover as much as five years as they contend with legal fees and child care, rather than the one or two years often recommended, financial advisors say.
A higher withdrawal rate coupled with the need for a portfolio to last longer isn’t easy to fix. RBC’s Stern says it makes finding a stream of guaranteed income to cover basic expenses even more important—through pension, Social Security, a low-cost income annuity or bond portfolio—as is investing the rest of the portfolio more aggressively.
There’s no magic bullet, though, and the biggest adjustments will come from rethinking spending or finding other income streams. Children under 18 can get Social Security benefits on their grandparents’ record if the child is legally adopted or in certain other conditions where their biological parents are dead or disabled. Going back to work enough hours to qualify for health-care benefits, if an option, can also help. Those on Medicare need to find another option for health care for their child.
For those who are still working, continuing to do so—even if it means hiring caregiving help, as Hudgins did with a live-in nanny—is beneficial. Many grandparents don’t want to leave their grandchildren with others at what is a difficult transition period in their lives, but Amy Goyer, AARP’s family and caregiving expert, recommends grandparents take a short leave of absence or sabbatical to evaluate their options, such as switching to a part-time schedule, rather than quitting entirely since their portfolios will have to work harder for longer now.
Insurance and trusts
While many people near retirement give up term insurance policies, Corey Sunstrom, director of financial planning at Hobart Financial Group, says grandparents in this situation should consider buying a policy. A healthy 60-year-old is still likely to be able to buy a 15-year term life insurance policy, for example, until the child hits adulthood. Benefits are tax-free. Grandparents should also name a successor guardian for the child if something were to happen to them, especially because assisted-living facilities and senior-living communities typically don’t allow children.
Also worth considering: making the grandchild a beneficiary of a traditional individual retirement account or Roth IRA, says Sarah Man, managing director of investments at Wells Fargo Advisors. The child will be able to withdraw contributions without penalty for any reason, and, if a Roth IRA has been funded for five years, he will be able to use the earnings for qualified education expenses, such as college.
Such retirement accounts or life-insurance policies should be held in a trust to protect the assets for the grandchild, especially if the parent is not in the picture or may not be fit to manage or protect their assets. The trust can also be useful so that withdrawals from an IRA, inheritance, or life-insurance policy are paid out in a way that doesn’t jeopardize a child’s eligibility for special needs or other benefits, Sunstrom says.
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