Retirement readiness – Include preparing for family caregiving expenses

Published on January 6, 2025

Many Americans are already struggling to save for retirement due to the high cost of living. Another factor that’s throwing pre-retirees and retirees off their retirement savings target is the cost of family caregiving, which affects 53 million Americans today.
According to a study by the Columbia University Mailman School of Public Health, potential caregiving expenses average $7200 a year, a figure that puts a big dent in many people’s savings. The study also revealed:
• Caregivers who begin their duties at a younger age risk an average 40% to 90% deficit in retirement savings by age 65, depending on salary, compared to non-caregivers (due to reallocating retirement contributions toward caregiving costs).
o If someone earning $50,000 a year begins caregiving at age 35, that individual will see a 107.8% retirement savings deficit at 65 years old.
o For those earning $75,000 a year, the gap is 60.4% gap and for those making $100,000 a year, the deficit is 46.9% deficit.
• This deficit is equivalent to another seven to 21 years of work to recover the savings loss.

The cost of caregiving also affects generational wealth, since the caregiver is less able to manage debt and accrue significant savings—for retirement as well as an inheritance.

The Society of Actuaries (SOA) Research Institute’s biennial Retirement Risk Survey gathered insights from U.S. retirees and pre-retirees aged 45 to 80 across all income levels. Among the initial findings are middle-aged and older Americans’ growing awareness of the need to financially prepare for unexpected events—and the decrease in amount they’ve been able to save due to the challenges of familial caregiving and inflation/cost of living.
The survey also revealed that beyond the financial impact of caregiving:

• Male and female pre-retirees (36% and 26% respectively) and female retirees (35%) cited the emotional and/or physical toll.
• Male retirees (14%) cited long-term care planning as the impact of caregiving.
• Among pre-retirees, 38% feel unprepared to take on a family member’s medical emergency or health issue; 27% of retirees expressed the same.
• More pre-retirees have adjusted their savings strategies due to inflation, especially for individuals who earn less than $100,000 a year.

Plan now for caregiving expenses during retirement

1) If you are financially able to do so, build up a savings cushion in a liquid account in addition to funding your IRA or workplace retirement plan. Putting aside one to three years’ worth of living expenses in an accessible account will provide an important buffer to help prevent retirement account drainage
2) Create a sustainable budget and develop a retirement roadmap with your trusted advisor that protects your assets as much as possible. Factor caregiving costs into your financial plan along with your own healthcare, housing, and other essential expenses.
3) Explore long-term care options and the associated expenses for yourself and your loved ones.
4) Take advantage of catchup contributions to your retirement plan if you qualify (based on age).
5) Many financial experts recommend contributing 10-20% of your salary for retirement. If you have a self-directed IRA, continue to diversify your portfolio with alternative assets whose performance is not correlated with the (volatile) stock market.

Legislation to ease the caregiving financial burden

Nearly 25% of all adults and more than half of people in their 40s support at least one child and at least one parent over age 65. Plus:

• By 2030, all baby boomers will be 65 or older (20% of the U.S. population).
• The U.S. Census Bureau projects that by 2034, there will be more people over age 65 than under 18—the first time ever.

The greying of America will likely bring an increase in family caregiving. Rep. Josh Gottheimer (D-NJ) and Rep. Mike Lawler (R-NY) are cosponsoring a bipartisan Caregiver Financial Relief Act that aims to ease the financial burden by waiving early withdrawal penalties from retirement accounts for family caregiving expenses. There are other bipartisan bills working their way through Congress.

• Credit for Caring Act – allows working family caregivers to turn up to 30% of their family caregiving expenses into a tax credit (up to $5000 a year).
• Improving Retirement Security for Family Caregivers Act – permits family caregivers to contribute up to $7,000 annually to a Roth IRA, regardless of income level and even if not working full time.
• Lowering Costs for Caregivers Act – allows funds in flexible spending, health savings, and medical savings accounts to be used toward a loved one’s medical expenses.
• Catching Up Family Caregivers Act of 2024 – allows qualified family caregivers to make catch-up contributions to a retirement account for up to five years.
• Expanding Access to Retirement Savings for Caregivers Act – allows workers who left the workforce to provide dependent care services to make catch-up contributions to their retirement accounts before reaching age 50.

Shore up retirement savings with a self-directed IRA

We all want our retirement years to be ones of ease and enjoyment—without dealing with the financial cost of family caregiving. You can optimize your retirement savings by including alternative assets in a self-directed IRA (SDIRA).

Rather than rely on unpredictable stock market performance (and deal with that roller coaster), the alternative assets allowed in a SDIRA are generally longer term, illiquid investments that build portfolio diversity and a hedge against stock market volatility. If you already know and understand these nontraditional investments (such as real estate, precious metals, private equity funding, commodities, and many more), consider bolstering your financial future by opening a new SDIRA.

Need more information? Register for a complimentary educational session or contact our helpful team of SDIRA experts at NewAccounts@NextGenerationTrust.com or 888-857-8058.