Financial Strategies for the Sandwich Generation

College Funds (529 Plan), Financial Planning, Investing & Retiring, IRA, Long-term Care Insurance, Retirement

A growing number of American couples are feeling the financial squeeze from all sides — their children, their parents and each other. They have been dubbed the “sandwich generation” because they face a wide range of different kinds of financial pressures from both the prior and next generation.

For starters, there’s the pressure many couples face just to pay the bills each month. Many families are still struggling to get back to their former levels of income before the Great Recession occurred — especially those who were hit hard by job losses and may not have been able to land another job that pays as much as they used to earn.

Beyond just paying the bills, there’s the need to stash away some money every month for retirement. Unfortunately, it appears that many Americans are doing a very poor job of this. Research conducted by Fidelity Investments indicates that over half of all Americans have saved less than $25,000 for retirement, and a quarter have saved less than $1,000.

Now throw in saving for college. The cost of college tuition is rising faster than the rate of overall inflation, making it harder for parents to save enough money to pay for their children’s future college educations. And to top things off, many families are now helping care for aging parents — either bringing them into their homes or helping pay for expensive assisted living or nursing home care.

Set Some Priorities

If you can relate to these kinds of financial pressures, you might be throwing up your hands right now and wondering what you can possibly do to deal with these multiple (and often conflicting) financial responsibilities. While there’s no magic bullet that will solve the problem, many experts say the first step is relatively simple: Accept the fact that you can’t do everything, and then start setting some priorities.

One mistake many people make here is putting what appear to be the most immediate and pressing concerns at the top of their priority list. For families dealing with all of these challenges, the order of urgency might be helping their parents, saving for their kids’ college educations, and then saving for retirement, since this is probably the priority that’s furthest out on the timeline.

But for many people, this is actually the opposite of what their financial priorities should be. Delaying saving for retirement means missing out on long-term portfolio growth and the opportunity to benefit from compounding returns. The biggest advantage retirement savers have on their side is time — and every year that goes by in which saving for retirement is neglected is a year that can never be recouped.

In fact, it could be argued that failing to save for retirement jeopardizes your children’s futures more than failing to save for their college educations does. If you don’t have enough money to retire and pay for your own healthcare and assisted living costs when this time comes, you could end up being a heavy financial burden on them — and placing them in the same tough financial situation you’re in now.

Put Retirement First

Therefore, many experts say that saving for retirement should be the number one financial priority (after paying all the monthly bills, of course) for most families. Though your children might be of college age long before you plan to retire, there are many other avenues available to help pay for college. For example, they could earn scholarships, take out loans or work part-time to help pay for their own college educations. Another way to save significantly on a four-year college education is to study the first two years at a Community College. Similar general education courses are available there at dramatically lower tuition levels, while remaining at home for two years offers added savings.

There is an investing tool that can help you save for both college and retirement at the same time: the Roth IRA. Contributions to Roth IRAs (but not earnings) can be withdrawn tax- and penalty-free at any time and for any reason — including paying for college expenses. So one strategy is to withdraw some Roth principal to pay for your children’s college educations while leaving the earnings in the account until you retire — effectively killing two birds with one investment stone.

If you want to contribute money to an account that’s devoted exclusively to college savings, your best bet might be a Section 529 plan. These allow tax-deferred growth and possibly a state tax deduction as well, depending on where you live. Traditional custodian accounts (referred to as UTMAs and UGMAs) may also be viable college savings options, as well as Coverdell Education Savings Accounts (ESAs), although the annual contribution limit for Coverdell ESAs is relatively low (just $2,000).

Helping Your Parents

When it comes to helping care for aging parents, the issues often go beyond financial to emotional as well. The first step is to have an open and honest conversation with your parents about their financial and health status. It’s only fair that you be brought up to speed on their overall financial situation — their assets, liabilities and expenses — if you are going to offer to help them financially.

This will be difficult for some parents, who still might view themselves as a provider and protector of their children, rather than the other way around. Try to be sensitive to their feelings in this regard, and do what you can to help them feel as comfortable as possible, given the situation.

Long-term care (or LTC) insurance is one solution for dealing with ongoing nursing home and assisted living expenses for aging parents. But this needs to be purchased well before parents reach the point of actually needing this kind of assistance. If it’s too late to buy an LTC policy for your parents, you might consider buying one for yourself and your spouse to help protect your children from having to face tough financial choices like these during the later years of your life.

Keep in mind that you might qualify for federal tax breaks for expenses incurred in caring for aging parents. Qualification hinges on whether or not you can claim your parents as dependents. If you can, you might be able to claim an additional personal exemption, deduct some of your parents’ medical expenses that you pay, and claim a tax credit for care-giving expenses.

Devise a Plan

Whether you are currently dealing with conflicting financial pressures like these or anticipate that you might at some point in the future, the key is to devise a plan — and then stick to it. Talk to a financial advisor for objective guidance and advice. Sometimes, getting input from a trusted advisor outside your family can help you see things from a little bit different perspective.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

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