Individuals ranging in age from 35 to 44 – and sometimes older – often fall into a category referred to as the "sandwich generation" because they find themselves taking care of their children and parents at the same time. While there is no cookie-cutter retirement planning solution, there are some basic guidelines that may be helpful to those who find themselves in this situation.

Save for Retirement – or Pay for College?

Most parents want their children to graduate from college debt-free so that they can start their financial planning with a clean slate. While some individuals may be able to pay for their children's education and still save for retirement, most cannot. The question then becomes, which is the better financial choice? When pondering such a decision, the options available for financing should be taken into consideration. For instance, consider the following:

– Retirement. With the shift from defined-benefit plans to defined-contribution plans and the fact that Social Security doesn't provide enough for a comfortable retirement, it is becoming increasingly apparent that the individual taxpayer is largely responsible for financing his or her retirement years. As such, individuals must save as much as possible to increase the possibility of experiencing a financially secure retirement and to make working during retirement optional, rather than mandatory. (For further reading, see The Demise of the Defined-Benefit Plan.)

– College Expenses. Options for financing college include grants for those who are eligible, scholarships for those who qualify and loans. While loans do mean that the college student will likely have outstanding debt after graduation, the student will have several options and many years for paying off those loans.

Children who are opposed to college loans may consider a work-school program, where they work full-time and attend college on a part-time basis. While this could extend the amount of time it takes the child to receive a degree or diploma, the trade-off is being debt-free after graduation. Many employers will even reimburse college students for some or all of the tuition expenses, provided they receive a passing grade for the course.

"Some families want their children to have some skin in the game and will pay for some college themselves. For those families, contributing more to retirement than college would probably work best. For those who don't want their child to have to pay anything, they'll probably pay more toward college until college is done, and then ramp up their retirement savings.," says Derek Hagen, CFP®, CFA, financial planner and founder, Fireside Financial LLC, Edina, Minn.

The key here is that financing is available for college, but not for retirement. Financing companies assume that when a person finishes college, he or she will move on to an income-generating career; but when a person enters retirement, there is no income for his or her next stage in life. (Read more on financing education at Don't Forget the Kids: Save for Their Education and Retirement.)

"Most families prioritize college savings over retirement because it's the closest large expenditure. What they don't realize is that retirement savings needs are usually massive, well over 10 times, if not 20 or 30 times, the savings required for college. Certainly, save for college, but not at the expense of your retirement goals," says Rob Schulz, CFP®, president of Schulz Wealth, Mansfield, Texas.

Boomerangers Add Expenses

While most children leave their parents' homes to live on their own by their mid- to late-20s or thereabouts, many  do not. Some who do leave also choose to return for various reasons. These individuals are commonly referred to as boomerang kids. Unfortunately, some boomerangers fall back into the pattern of having their parents pay for their living expenses, which can have a negative impact on the parents' ability to save for retirement.

Parents who find themselves living with boomerangers may want to consider formalizing the financial aspects of the relationship. Examples include having the child sign an agreement to pay a certain amount for rent, food and utilities each month. Parents may also want to make it clear that, like tenants, they will be evicted if they do not pay their fair share of the expenses. 

Consider Long-Term Care Insurance for Aging Parents

The cost of caring for aging parents usually increases as they get older, and most of the expense is due to healthcare costs. Further, adult children who are unable to pay the cost for elder care often find it necessary to take care of their parents themselves. Similar to the situation with boomerangers, this can put quite a strain on the caretakers' finances and could prevent them from saving for their retirement.

One way of ensuring that the cost of healthcare for aging parents is covered is to purchase long-term care (LTC) insurance. LTC can be used to cover various expenses, including in-home healthcare or healthcare at nursing homes. LTC not only serves to ease the financial burden on the children, but could also negate the need for aging parents to tap into their retirement savings to pay for healthcare.

Balance Your Savings for Retirement: Necessities and Emergencies

As an individual gets closer to middle age, panic can set in if an assessment of retirement savings indicates that the program is not on target. The natural reaction is usually to increase the amount being saved in order to get closer to the target saving amount. However, caution must be exercised – saving more than an affordable amount can have a negative impact. When deciding whether to increase the amount being saved in a retirement account, the following should be given careful consideration:

  • Why is the savings goal not on target? If it is because the budgeted amount is not being saved on a regular basis, is that a result of the amounts being redirected toward unnecessary expenses? If so, an easy fix would be to stick to the budget and eliminate these unnecessary expenses. If the amount is being redirected toward things that the family needs, perhaps the retirement savings goal and the budget are not realistic and need to be revised. (For related reading, see The Beauty of Budgeting.)
  • Is increasing the retirement savings amount a realistic objective? It may seem like a good idea to add larger amounts to your retirement nest egg. However, if it means that the reduction in disposable income will either result in increasing credit card and other debts incurred for everyday expenses, increasing the retirement saving amount could actually have a negative effect on your bottom line
  • Were withdrawals from the retirement savings accounts used to cover emergencies? If it becomes necessary to withdraw amounts from your retirement account to cover emergencies, it could mean that the amount in your emergency fund is inadequate. Financial experts project that at least three months' worth of net income should be maintained in an emergency fund account to cover unplanned expenses. Similar to retirement savings, amounts added to the emergency fund should be treated as a recurring expense, so that it does not create an unanticipated financial burden when a crisis hits. (To learn more, read How to Build an Emergency Fund.)

    The reccurring theme is that realistic budgeting is a key element of a solid savings program. The budget must not only allow for retirement savings and everyday living expenses, but should factor in allocations to an emergency fund.

    "One of the golden rules of budgeting in savings is to pay yourself first. Set up an automated savings plan where a monthly amount goes into your savings account that you do not touch," says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Mass. "If you pay yourself first, then you tend to adjust to a lower amount of discretionary spending. If you save what is left at the end of the month, you will likely not have anything left to save."

    "No matter your age, income, tax bracket, debt load, etc., having a budget forces you to pay attention to your cash flow – which helps avoid problems like bouncing checks, running out of money every month to pay bills, not saving enough for retirement, and more," says Martin A. Federici, Jr., AAMS®, CEO of MF Advisers, Inc., Dallas, Pa. "If you can’t deal realistically with your inflow/outflow situation, you’re not going to do well planning your financial future (and retirement) by just 'winging it.'"

    Ask for an Increase in Salary

    If you have been with your employer for awhile and have established that you are a valuable asset to the firm, it may be time to ask for a raise. Before doing so, be sure to document your contributions to the organization and the ways in which you add value. Also, consider whether the amount you intend to ask for is comparable to the results you have produced for your company.

    Quite a few services provide information on the average salary for certain job types and locations. A copy of such an analysis would go a long way in helping to make your case. Most employers will give fair consideration to a reasonable request for a salary increase.

    The Bottom Line

    Saving can be a challenge. One way to overcome that challenge is to treat savings as a recurring expense. In most cases, this is easier to accomplish when there is an increase in disposable income such as from a salary increase or change in family-status that results in fewer expenses.

    For others, it may mean cutting back on non-essential spending. Of course, mental health is just as important as financial health. Budgeting should not mean depriving yourself of a treat every now and then.