Save your parents’ finances (before they ruin yours)

If you’re already worried about your financial future, the Federal Reserve’s emergency rate cut may do little to calm your nerves about the economy and your investments. Stocks are down 10 percent from the start of the year, the housing market is in crisis and even slightly lower mortgage rates won’t help those who want to refinance if they have little or no equity in their homes already. It’s hard not to panic — especially when you consider that few of us have saved as much as we want or may need to in the future.

Our parents may not have saved as much as they need to either. CNBC correspondent Sharon Epperson, author of “The Big Payoff,” says that fact could increase our financial burden down the road. 

If our moms and dads are relying on us to pay for their expenses — from groceries to utility bills in early retirement to long-term health care in their 70s and 80s, how will that impact our own financial future?          

There’s been a lot of attention focused on the “sandwich generation” — baby boomers getting squeezed by having to pay college tuition and help pay off student loans for adult children, while also helping to financially support aging parents.

Offering financial assistance to parents has also become a significant issue for those in their late 20s, 30s and early 40s as their parents have fallen short of their savings goals.

Forty-six percent of baby boomers have saved less than $50,000, according to the 2007 Retirement Confidence Survey by the Employee Benefits Research Institute, which also found that most boomers also haven’t calculated how much money they’ll actually need in their nest egg to live comfortably in retirement.

Boomers may not feel the need to cut back on their spending or change their lifestyle to put more money away, but if they don’t, they’ll likely wind up leaning on their closest relatives for support — their children.

One in five households led by 25- to 42-year-olds has either started providing financial support for their parents or expects to do so soon, according to a 2007 study by Fidelity Investments. They typically spend about $3,500 a year food, utilities, health care needs and other expenses for their parents. Even if they don’t pitch in to cover bills for their parents right now, 14 percent of those Gen Xers surveyed by Fidelity anticipate having to support their parents financially in retirement.

Meanwhile boomers’ adult children may be just starting their careers or saving to send their own kids to college. These 20-, 30- and 40-somethings should be focusing on their own finances — but have likely saved a slim sum for retirement themselves. Fidelity found the average household retirement savings for those 25-42 years old is a mere $11,250. That would barely cover the long-term care cost of two months for a semiprivate room in a nursing home for an elderly parent (at $5,566 a month, according to AARP).

Most financial advisors say you need at least 80 percent of your pre-retirement income in your golden years. If you’re spending $3,500 a year supporting your parents in their retirement, that money could have gone into your IRA or 401(k). You’re jeopardizing your own financial future.

So how do you prevent your parents from falling into financial peril and taking you down too?

1. Watch parents’ spending habits
Do you really think your parents could afford that Caribbean vacation after going to Europe and buying a new car last year? You know what your parents do for a living, and have a good idea of their income — are they living above their means? Or, have they changed, stopped vacationing, eating out, decided to sell the house that you thought you’d inherit? Listen for off-hand comments that your parents make about their financial situation — those can also be good clues.

2. Talk to your parents
Starting a conversation with your parents about money can be difficult. Parents don’t want to be a burden on their children and may not want to admit that they can no longer afford the mortgage, or spent too much on the car or a vacation.

Certified financial planner Ivory Johnson of The Scarborough Group in Annapolis, Md., advises: “Begin by talking about your own situation first. You can say, ‘Mom, I just drew up my will and I want you to have a copy in case anything happens to me. Where do you keep yours?’ ” Or talk about how you’re looking into hiring a financial advisor — who do they use? If your company just started offering a group long-term care insurance plan, find out if your parents have a long-term care policy. 

3. Figure out how much can you afford to contribute
If you’re married, you need to discuss with your spouse how much you can afford to help your parents and/or in-laws. Definitely do this before you offer to help your parents, suggests Judith A. Rosenthal, a senior financial adviser with Amerprise in New York. You don’t want to have a huge fight with your spouse and undermine your own financial plans. Have the same talk with your siblings. Expectations often fall on the most financially secure children, which can create tension in the family. So it’s important to talk candidly about what you can afford to contribute based on your own financial goals.

Says Rosenthal: Decide whether you’ll chip in a certain percentage of what’s needed based on your household income. Or come up with a lump-sum goal and have each sibling or household submit what they can afford. If it doesn’t cover the full sum and that’s all that you can contribute without it becoming a burden, so be it.

4. Get professional advice
Start by sending them articles you’ve read about retirement, wills, long-term care insurance. The AARP has terrific information on budgeting, investing and insurance on its Web site under the money and work section at Then, help them get a financial adviser. Offer some recommendations from friends and family members and then help them narrow down the list.

If you can afford to, “pay for the initial services just to make sure your parents follow through and get the advice that they need,” says Michael Kitces, who directs financial planning at Pinnacle Advisory Group in Columbia, Md. If the financial planner suggest long-term care insurance, pool resources with your siblings to pay for the policy. It can be costly, but more manageable if you split the costs. And it could potentially be a lot less expensive than paying for your parents’ nursing home in the future. CNBC personal finance correspondent is the author of “The Big Payoff: 8 Steps Couples Can Take to Make the Most of Their Money — and Live Richly Ever After" (HarperCollins).