Solutions for the Sandwich Generation
Updated June 16, 2008
Rande SpiegelmanCPA, CFP®, Vice President of Financial Planning, Schwab Center for Financial Research
Picture a triple-decker club sandwich, but instead of turkey, ham and lettuce, put yourself in the middle with your parents on the top and your kids on the bottom. In fact, nearly 10 million baby boomers between ages 41 and 60 find themselves "sandwiched" between financially dependent parents and children—just when paying down debt and saving for retirement should be a priority.1 Nearly one-third of boomers provided financial assistance to a parent last year, and about half are supporting at least one young or adult child.
Don’t get sandwiched! Consider these strategies to help you balance your family’s financial needs and your own.
The kids’ college vs. your retirement
You might be tempted to cut back on your retirement savings to save for the earlier goal of your children’s college. But you should explore other options first. You aren’t doing your children any favors if you put them through school only to become financially dependent on them down the road. After all, while financial aid is available for college, you’ll have a hard time getting loans or scholarships to fund your retirement later on.
Here are some ideas to help you achieve your goals for retirement and your children’s college education:
- Incent the kids to contribute. Set a target and offer your kids a "matching grant" contribution to a 529 College Savings Plan and/or Coverdell Education Savings Account of $2 or $1 for every $1 they come up with. There are many ways they can come up with their share: by getting good grades to qualify for scholarships or grants, applying for financial aid, working part-time, or taking out (and being responsible for repaying) student loans.
- Compare the costs of public vs. private schools. Consider which universities your family can afford and the possibilities for financial aid. The College Board is a good place to compare costs and aid packages.
- Consider sending your child to a junior college for one or two years, after which he or she can transfer to a four-year school. Also, if you live near a good university, you might save on room and board by having your child live at home.
What about financially dependent adult children who live at home temporarily, while they search for gainful employment? It may help to agree on some ground rules, setting goals and specific time frames for their (and your) financial independence.
Your retirement vs. your parents’
If your parents need assistance, then the first step—as hard as it might be—is to sit down with them and have a frank discussion about their finances. Everything needs to be on the table, including all sources of income and expenses (discretionary and non-discretionary), as well as assets and liabilities. Once you have an idea of their cash flow budget and net worth, you can help them explore their options:
- Cut back on unnecessary expenses. Let them know extravagant gifts for the grandkids aren’t required. Invite them along on family trips and pick up the tab when you can (they can watch the kids while you enjoy some time alone).
- Maximize their sustainable cash flow through a portfolio review and, if necessary, restructure their investments.
- Review their insurance coverage and deductibles for property and casualty, major medical, prescription drugs and long-term care to make sure they’re not paying too much for the wrong kind of coverage.
- Re-evaluate maintaining unneeded whole life insurance policies with built-up cash value. Suggest looking into a 1035 tax-free exchange to an immediate fixed annuity for extra cash flow.
- Tap the value of their home. They might sell and downsize—up to $500,000 in capital gains can be excluded from taxes for married couples filing jointly, $250,000 for singles; sell and move in with other family members; sell to family members and pay rent to live there; or take out a home equity loan or reverse mortgage.
Put yourself first
If you’re part of the Sandwich Generation, you’ve got a lot on your plate. Your natural inclination might be to serve yourself last, but that can jeopardize not only your financial health, but also your physical and mental well-being. If it’s important for you to be there for your family when they need you, then don’t forget to take care of yourself first.
Put a plan in place for your own retirement. Take advantage of employer-provided retirement accounts, at least up to the point of any matching contribution. Be sure to max out on a traditional deductible IRA or Roth IRA if you’re eligible, or a small business retirement plan if you’re self-employed. Put excess savings into your brokerage account. Then manage the whole thing from the top down with a tax-efficient asset allocation plan based on your risk tolerance and time horizon. Visit the Schwab Retirement Page for help.
Important Disclosures
1. "Baby Boomers Approach Age 60—From the Age of Aquarius to the Age of Responsibility," by Paul Taylor, Cary Funk, and Courtney Kennedy. Pew Research Center, December 8, 20051.
As with any investment, it is possible to lose money investing in a 529 plan. Additionally, by investing in a 529 plan outside the state in which you pay taxes, you may lose any tax benefits offered by your own state’s plan.
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