The Sandwich Generation

Individuals ranging in age from 35 to 44 or 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, the following tips may be helpful to those who find themselves in this situation and are struggling to save for retirement.

Key Takeaways

  • Those aged 35 to 44 and older often struggle to save for retirement while juggling financial responsibility for children and aging parents.
  • Funding a child’s college education should not come at the expense of your retirement goals.
  • Consider long-term care (LTC) insurance for aging parents.
  • Formalize financial boundaries for boomerang kids.
  • It’s also crucial to set a realistic budget, which should include an emergency fund.
  • Finally, it never hurts to ask for a raise, particularly if you’ve worked for the same company for a while and have a good track record.

Saving for Retirement vs. Paying for College

Most parents want their children to graduate from college debt free so that they can start their career with a clean financial slate. While some 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 a college education should be weighed carefully. For instance, consider the following:

Saving for Retirement

With the shift from defined-benefit plans to defined-contribution plans and the fact that Social Security has never provided enough for a comfortable retirement, individuals are largely responsible for financing their retirement years. As such, they 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.

Paying for College

Options for financing college include grants for those who are eligible, scholarships for those who qualify, and loans. While loans do mean college students will likely have outstanding debt after graduation, they will have several options and many years to pay them off.

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," says Derek Hagen, CFP®, CFA, financial planner and founder, Fireside Financial LLC, Edina, Minn. "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."

Financing is available to pay for college, but not for retirement.

Remember that college graduates move on to an income-generating career, while retirees rely on retirement savings rather than a job for income.

"Most families prioritize college savings over retirement because it's the closest large expenditure. What they don't realize is that retirement savings needed 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.

Set Financial Boundaries for Boomerang Kids

While most children leave home to live on their own by their mid-to-late 20s or thereabouts, many do not. Some who do leave also end up returning home 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 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. 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 insurance can be used to cover various expenses, including in-home healthcare or healthcare at nursing homes. It not only serves to ease the financial burden on the children, but can also negate the need for aging parents to tap into their retirement savings to pay for healthcare. If your parents can't afford the cost, helping them pay for it could be worth it in the long run.

Create a Realistic Budget

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.

Our surprising advice: Don't rush into it without some analysis first. Saving more than an affordable amount can have a negative impact. When deciding whether to increase what you save in your retirement accounts, first consider the following questions:

Why Is the Savings Goal Not on Target?

If it is because the budgeted amount is not being saved on a regular basis, and 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.

Is Increasing Retirement Savings 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 retirement savings could actually have a negative effect on your bottom line.

Were Withdrawals from Retirement Accounts Used for Emergencies?

If you find yourself needing to withdraw amounts from your retirement account to cover emergencies, it could mean that your emergency fund is insufficient. Financial experts advise that an emergency fund account should have at least three months' worth of net income to cover unplanned expenses. Similar to retirement savings, treat amounts added to the emergency fund as a recurring expense so that you aren't faced with an unanticipated financial burden when a crisis hits.

Realistic budgeting is key to 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 a Raise

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 for retirement can be a challenge, particularly when juggling the financial responsibility of children and aging parents. 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.