How the 'Sandwich Generation' Can Build a Better Budget

Your retirement may seem too far off to deny your parents and children resources, but you need to save today.

Grandchildren with their grandparents.

The "sandwich generation" is supporting two generations: their elderly parents and 20-something children.

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The "sandwich generation" is more hard-pressed than ever to support both adult children and aging parents. If you are a midlifer stuck between two generations, you are in for some tough conversations and even tougher decisions, financial advisors say, to ensure your own kids don’t inherit the same squeeze.

At least 15 percent of middle-aged adults are financially supporting both aging parents and children, according to January 2013 Pew Foundation survey of 2,511 adults throughout the country. “As they see what is going on with their parents, they are re-evaluating their own plans so that their children don’t have to do for them what they are doing for their parents,” says Steven M. Glazer, a senior financial services executive with MetLife who teaches a class on retirement roadblocks at St. Louis Community College.

The financial troubles of millennials are well-documented: Many are unemployed or underemployed, living with their parents and accepting help from their folks for gas, car insurance and cellphone bills. Meanwhile, even well-prepared senior citizens can suddenly find their medical and living expenses spiraling out of control.  

[See: 7 Tips to Help Millennials Save For Retirement.]

Sandwiched between these generations are dual-career midlife couples. Their kids may expect them to keep shelling out money. These couples are often not in a position to sail in at a moment’s notice to help an aging parent with errands and transportation to appointments. Distance and job responsibilities thus convert logistical assistance to financial assistance as middle-aged children hire local caretakers to help their aging parents.

When loved ones need help now, it’s easy to see how money intended for retirement gets diverted. "Most people are spending money on their parents without thinking about their own futures," says David R. Cichon, a certified estate planner and regional vice president of Householder Group, a consortium of estate and retirement planning advisors.

Here are five steps to keep your own retirement on track as you help your aging parents and adult children.

Pay it forward for yourself. Score an easy win by automatically saving through your employer’s retirement plan and be sure to capture any profit-sharing or matched funds, says Jim Poolman, executive director of the Indexed Annuity Leadership Council. “If you get the full company match, that’s a 100 percent return,” he points out. Don’t borrow against that growing fund to support your kids or parents. Yes, you’ll be paying yourself back, but with interest.

Reconcile yourself to tough choices. “If you have less than 10 years of a working career in front of you … you have to have a serious realignment of your priorities,” says Dan Houston, president of retirement, investments and insurance with the Principal Financial Group. You may need to sell your house and move to a smaller one, make do with one car and otherwise trim expenses to ensure you have enough money to channel to your own future while helping your parents and children now.

Survey resources. Instead of reacting to needs, take a step back to understand everybody’s resources. Many midlife couples have assumed that at least some college expenses would be picked up by apparently well-off grandparents. It’s a double whammy when those grandparents not only can’t help with college but also need help themselves. Sort through the moving pieces of financial assets and assumptions to see what is owned and what is owed.

[See: 7 Things Your Financial Advisor Should Not Tell You.]

Millennials may have to chip in on your household expenses while cutting back on their own lifestyle expectations, advisors say. You might have to scale back your promise, made in rosier times, to pay off student loans on behalf of your child.

Meanwhile, if medical and living costs are overtaking your elderly parent’s fixed income, it might be time to liquidate assets on a planned, orderly basis. Considerations include:

  • Review gifting plans. Until recently, seniors could give away assets to draw down their estates in advance of entering long-term care paid by Medicaid, as long as the assets were given at least three years prior. Now, Poolman says, some states are changing the "look back" period to five years. They are also more stringently investigating asset distribution to weed out fraud. Plan and act well in advance if you are counting on a generational transfer of assets.
  • Examine the cash value of life insurance plans. Some plans have conversion or cash values.
  • Appraise hard assets to learn their market value. It can take time to sell jewelry, art and real estate. The more you know in advance about the assets’ market value and the sale process, the better prepared you are to capture the maximum.

Estimate what you’ll give up for what you get. Look beyond today’s urgent needs by estimating the "opportunity cost," Poolman counsels. That means figuring out what you have to give up in the future for each financial decision you make today.

You may visualize your own retirement in the hazy future while your parents’ and children’s needs are right in front of you. But money you spend on them today is money you won’t have to pay your own bills in 25 years. Pairing hard future numbers with today’s decisions makes the consequences concrete and helps you better understand the direct results of diverting retirement savings to today’s needs.

[See: How Long Will Your Savings Last?]

Activate an end-of-life financial plan for your parents. It’s never too late to marshall a plan, Poolman says. “You get a sense of control, and the best that can happen is that you save money by being proactive,” and absorbing, say, legal and medical expenses on a nonemergency basis, he says.

Set up an annual financial checklist for yourself and your aging parents and still-launching children. Circumstances change. Your child might be able to afford her own health insurance through new government programs, or your parents' shifting assets might dictate a change in their will. 

Take a cue from what your parents are going through to stoke motivation for your own commitment to retirement saving, Houston says. Monitor your plan but don’t micromanage it, he recommends. Orient your portfolio to focus on long-term outcomes that address inflation and income. “When you’re protected for income, principal, volatility and inflation, you’ve solved for your priorities,” Houston says.