Helping Elderly Friends Gain Control of Their Financial Life

My wife Kathleen and I have elderly friends with a problem that’s common across America.  Our friends, a married couple both in their eighties, are symptomatic of the perils of “suddenly” growing old.  If the first partner to die or lose competency is the one who handles the money, the family is financially adrift.  Bad decisions, motivated by fear and exacerbated by a lack of understanding, become commonplace.  What’s sorely needed is an understanding of our friends’ current and future financial condition and how that will impact their ability to live in a manner that is least disruptive to their lives.

Our friends’ plight is not unusual.  As such, an approach to resolving the crisis is broadly applicable.   

This article is my attempt to organize how I intend to help and to provide a template for others as well.

But first, let’s understand that the results of our efforts are hypothetical.  We’re going to make many, many assumptions that wind-up inaccurate or plain incorrect.  Don’t let that stop you!  This isn’t a formal financial plan.  And, it’s impractical to spend an inordinate amount of time on it.  My view is it’s better to address the issue using common sense as a guide along with information easily obtained than do nothing.  Keep in mind that the objective is to raise a red flag calling for additional investigation and planning OR to provide comfort to our friends that their situation is not as dire as they fear. 

Job number one is to get a handle on the financial assets of the couple.  Here’s a list of financial assets to begin the search:

  • Stocks
  • Bonds
  • Checking and savings accounts
  • Gold coins, bars and certificates
  • Publicly traded partnerships

It’s unlikely you’ll find actual certificates of ownership.  Instead, look for monthly statements from companies that hold the assets.  Consider looking at a recent tax return.  Interest and dividend income, as well as income or loss from the sale of securities will be reported.  Track back to the issuers of statements reporting the income for the tax return to find out where assets are held.  Differentiate between “taxable” and “non-taxable” accounts.  Non-taxable accounts include 401(k)s and IRAs.  Next, determine the amount of pension income the couple receives (this will also be reported in a tax return).  Include social security and annuity income.  I would make sure to understand the duration of the cash in-flow and the tax consequences that arise.  For instance, if the asset is an annuity, does it terminate in the future?  If so, when?  To what extent is the amount taxable (for instance, might some of it be a return of capital)?  How is the amount taxable (for instance, as capital gains or ordinary income)?

Next, I’d like to understand the couple’s periodic costs and other cash outflows.  Look for surprises!  Our friends have committed to nursing care for the husband’s sister.  Remember to give consideration for needs not present at the moment (particularly long-term care).  Similarly, some cash-outflows may change markedly over time (such as residential costs if a personal residence is sold and replaced with a less expensive alternative).   Such costs might include:

  • Auto expense
  • Auto payments
  • Care for children or other family members
  • Food and clothing
  • Income tax
  • Insurance: Health care
  • Insurance: Other types including:
    • Auto
    • Home
    • Life
    • Long-term care
  • Mortgage
  • Nursing and long-term care costs (current and anticipated).
  • Pet care
  • Real estate tax
  • Recreation
  • Travel
  • Unreimbursed medical expenses
  • Utilities


Also, I wouldn’t forget to ask about insurance that provides coverage for some of these expenses, such as long-term care.  It’s helpful to obtain the actual insurance policy and, if necessary, speak with the agent or representative to get clarification.

As long as I’m thinking about it, you might consider confirming that important bills have been paid.  Here’s a short list in no particular order:

  • Property tax
  • Home mortgage
  • Life and long-term care insurance
  • Health insurance

Now, I’d begin thinking about the fair market value of assets.   This isn’t the best time to sell.  From stocks to real estate to art, the value of broad asset classes has taken a hit over the last few years.  Never-the-less, unencumbered assets may need to be liquidated — preferably in an orderly fashion — to maximize yield.  The process I’m outlining here will help accomplish that as it will provide long lead-times between now and when funds are needed.  Here’s a sample list of non-financial assets:

  • Antiques
  • Boats and airplanes
  • Classic autos
  • Fine art
  • Jewelry (especially gold!!)
  • Personal residence
  • Vacation home (or time-share)

Assign a preliminary value to each.  Be conservative!  And don’t delay!  Fine-tune the asset values later on.

Okay!  I think we’re ready to take a hard look at our friends’ current and future financial condition.  Our assembling of information is the hard part.  The actual analysis is easy.  Here’s the basic outline:

Income and other cash inflows
  Less expenses and other cash outflows
Equals Excess Cash Flow or Deficit

Excesses are good; deficits are bad.  The presence of a deficit must be covered with the sale of financial assets such as stocks, bonds and savings accounts or the liquidation of non-financial assets.  Unfortunately, excess cash flow tends to turn to a deficit as time goes on.  Hopefully, asset values will recover, but I wouldn’t stake my life on it.

Set-up three columns: Year 1, Year 2 and Year 3

Let’s create our best estimates for the twelve months ending in one year, two years and three years.  Eyeball the information for each category of income, cash-inflow, expense and cash-outflow.  Increase or decrease the category over time as you see fit – this is where judgment comes into play.  When you finish filling-in the spaces, net the inflows against the outflows, sit back and evaluate the results, including trends.  If, as I suspect, the trend is towards a narrowing of cash inflows over outflows, how long is it before you’ll need to liquidate assets?

Next, what do you think about the results of your analysis?  Is there an immediate cash flow deficit?  If so, I’d say it’s a call to action.  If not, does there appear to be a turning point any time in the future?  If there is, I’d suggest you count back twelve months and put a tickler in your calendar for follow-up.

What sorts of actions can you take when it seems your friends are headed for trouble?  Not all your options include a liquidation of assets.  For instance, a home with little debt and plenty of equity can be used as collateral for a home equity loan.  Banks are looking long and hard at borrowers these days.  However, an elderly couple with little debt, some cash inflow from, say a pension and social security, and additional assets such as stocks and bonds, may be viewed as a pretty good risk.  A home equity loan requires relatively small monthly payments.  It offers excellent flexibility and a source of cash on an as-needed basis.  Later on, if cash becomes available, the home equity loan can be repaid and if un-funded needs arise again, can be dipped-into without disturbing investments or other assets. 

However, if necessary, and with enough warning, assets can be liquidated.  Financial assets are the first to turn to.  However, their liquidation may give rise to income tax consequences.  It’s a good idea to immediately organize the sale of traditional big-ticket items, such as houses, autos and the like.  The more difficult sales (art and antiques, for example) will take longer.  There are reputable dealers who can help (finding one is the subject of another blog).   I can’t emphasize enough the importance of “lead-time”.  The more time you give yourself to sell assets the better the result.  And remember: Just because you’ve put something up for sale doesn’t mean you’re obligated to sell it! 

I’m in the business of figuring-out these sorts of problems.  However, if you follow my blueprint I think you’ll find the solution to be intuitive rather than mysterious.  It’s all about knowing what the needs of your friends are, their sources of cash in-flow and out-flow, and the nature and value of assets.  For the most part, there’s no element of the solution that, at some point you haven’t previously come across.  The most complicated math is addition and subtraction!  But, if you need a little assistance, even if only as a morale booster, there are plenty of folks out there who can help.

Good luck!  You’re doing the right thing!

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