When you find yourself responsible for supporting your grandchildren, it's important to revise your financial plan, from your monthly budget to your retirement portfolio.
For many people approaching retirement, life can seem like it’s going along according to plan. Now that their kids are grown and out of the house with families of their own, they’ve settled into the role of doting grandparents.
But whether because of a death in the family, divorce or problems with mental illness or drug addiction, more than 6 million grandparents across the country are raising their grandchildren, according to the U.S. Census Bureau’s 2006 American Community Survey.
The duties of 2.4 million of these grandparents go beyond providing food and shelter for their child and grandchildren. They also serve as primary caregivers, with 53 percent caring for their grandchildren for three or more years.
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Whether you’re already raising your grandchildren or you think you will be soon, a little planning goes a long way toward protecting your financial future while providing for theirs.
When you find yourself responsible for supporting your grandchildren, it’s important to revise your financial plan, from your monthly budget to your retirement portfolio.
Minimize risk exposure
Minimizing your risk exposure becomes imperative when you have dependents.
If you let your life-insurance policy lapse after building your retirement portfolio to a comfortable level, now’s the time to strongly consider buying a new term-life policy.
In addition, you’ll need disability if you’re still in the work force. Plus, you might also look into getting long-term-care insurance to cover the expenses of any unexpected health problems.
“You have to stay financially strong,” says Mike Kavanagh, a certified financial planner with Capital Investment Advisors. “You can’t deplete your reserves, because if things start to not go well for you, you can’t turn around and ask your child for help since he or she is the one you’ve been helping. It’s a new burden, and you need to make sure that you’re covered.”
Revise your estate plan
You designed your retirement portfolio to cover your needs. But if you plan to leave the balance of your assets to your grandchildren, consider setting it up as a “stretch” trust, where the beneficiaries receive a monthly distribution check instead of one lump sum.
“They can make some foolish mistakes if you dump all of the money on them in a relatively quick period of time,” says Jeff Call, shareholder and managing director in charge of personal financial services for Bennett Thrasher.
“A trust structure puts another person between the child and the money, and it also offers other benefits, like creditor and divorce protection.”
Tap the system
Whether they’re government-sponsored or offered through nonprofit organizations, financial resources exist that can make life easier for grandparents raising grandchildren.
“The biggest mistake that grandparent caregivers make is going through their whole retirement, pensions and bank savings before realizing or finding out that there are some financial resources, although limited, that might have helped them,” says Sylvie de Toledo, author of “Grandparents as Parents: A Survival Guide for Raising a Second Family.”
For instance, grandparents who provide more than half of the grandchildren’s support can claim them as dependents when they file their income taxes, and they may be eligible to take advantage of other tax credits, including the Earned Income Tax Credit, the Child and Dependent Care Tax Credit and the Child Tax Credit.
In addition, most state social-services departments issue child-only grants, typically around $200 per month and funded through Temporary Assistance for Needy Families, or TANF, which do not consider the grandparents’ income when determining eligibility.
Low-income families may be eligible for larger family grants.
In addition, children whose parents are deceased, as well as those who meet other conditions, may be eligible to receive a monthly stipend through Social Security.
Get respite assistance
Grandparent caregivers who need someone to watch their grandchildren for a few hours after school until they get off work can turn to local organizations, such as the Boys & Girls Clubs of America or the YMCA, for low-cost options.
If you feel hesitant about tapping federal or local resources because you think you have enough money to get by without help, make sure you double-check your math before you pass up the assistance.
“In today’s age, you might think that you’re financially independent, but it depends on how you model your retirement,” Call says. “Even if you’re worth several million dollars, it may not cover you, depending on your lifestyle and how long you live.”
Still feel uneasy? Consider putting any financial assistance you get into a 529 plan to help offset the cost of your grandchildren’s college education.
Consider college costs
Even if the grandchildren’s day-to-day living expenses don’t affect your budget, it’s easy to get in over your head when you tack on the cost of paying for college. Proceed with caution before you tap your nest egg to foot the bill.
“You can finance college, but you can’t necessarily finance your retirement,” says Frank Addonizio, financial adviser, Ameriprise Financial Services. “Don’t feel guilty if you can’t cover the full bill.”
Fortunately, your grandchildren have numerous options for reducing the cost of their college educations. Simple things, such as living at home and commuting to a community college or public university, will shave thousands off the total cost.
Plus, filling out the Free Application for Federal Student Aid, which determines a student’s eligibility for grants, scholarships and federally subsidized loans, and the estimated family contribution, or EFC, toward college expenses, can ease the financial burden.
Although your income and assets will factor into the equation if you’ve adopted your grandchild, it’s still worth taking the time to apply, as your grandchild may still be eligible for some financial aid.
Should your grandchildren need to take out loans for school, you can help reduce the burden without absorbing the full cost by covering the monthly payments for a few months after they graduate to give them time to get on their feet.
Be upfront on finances
If your grandchildren have their hearts set on a private university but you can’t afford to send them there without jeopardizing your retirement, be upfront with them about how much, if any, you can contribute toward the bill, as well as what expenses they will be responsible for on their own.
Once they calculate the true cost over four years, the sticker shock may convince them to make more economical choices.
Above all, it’s important to remember that you’re not in this alone. Many communities have support groups available for grandparents raising grandchildren, which provide everything from social activities to “been there, done that” advice.
Check out these resources: Family PLUS, Generations United, AARP’s Grandparenting, The Grandparent Foundation and GrandsPlace.
“Caregivers often feel alone and isolated, not knowing where to turn, who to turn to, where to start,” author de Toledo says. “When they join a support group, they meet other families who’ve been in a similar situation and who can help them navigate the system to get the resources they need. They need to know that there’s help out there, that they don’t have to do this alone, and that their feelings of being on a roller coaster from day to day are perfectly normal.”