If you currently have at least one child who is dependent on you financially and at least one aging parent who may also require financial support, you’re in what’s known as the “sandwich generation.”
You may be starting to take care of your parents’ health and financial needs while still helping your children financially. “You’re squeezed between those two commitments,” explains John Campbell, senior vice president at U.S. Bank Private Wealth Management, “which can potentially put your own finances in jeopardy.”
While it’s a gift to help those you love, you can’t neglect your own finances. “If you find yourself sandwiched between both responsibilities, you need to take a disciplined approach to financial planning,” Campbell explains.
Even if you’re not currently sandwiched between these two roles, there’s a chance you might be in the future, so it pays to plan ahead. Here are some tips for creating a financial strategy when offering financial support to others.
Take inventory of everyone’s needs and non-negotiables
When providing financial support to others, the last thing you want to be is surprised. Of course, unexpected expenses will occur. But you’ll be able to plan better if you have a clear idea of everyone’s current financial needs — including your own.
“To understand your parent’s needs and your children’s needs, you first have to understand your own needs,” says Campbell. Sit down and assess your current finances, including all your income sources and expenses each month, aside from the support you may provide to children or parents. Be as specific as you can to get a clear picture of your financial needs.
Next, move on to your parents. Create a line-by-line breakdown of what their monthly financial needs are. It can be helpful to break down each cost and determine what they can afford on their own and where you might need to help. Identify their essential expenses, and try to match those up with any potential sources of income, such as a pension or Social Security benefits. Gather details on their healthcare plan and what it will cover. If you have siblings, consider asking for help with the time or cost of care.
When it comes to your children, there might also be areas to spend less. For example, if you have young children, are there ways to cut down on daycare or after-school costs? Can you enlist a family member to help with childcare for part of the week? If you have children who are in or nearing college, explore grants, scholarships and other funding options. Or, if you have adult children and are financially supporting them in some way, consider talking to them about ways they can be more financially independent.
While these decisions aren’t easy, you have to differentiate between where you can reasonably control expenses and where there isn’t room to budge.
Fund yourself — and your retirement — first
When it comes to non-negotiables, your future financial security needs to be at the top of the list. You don’t want to outlive your resources in retirement. Campbell suggests increasing your savings as much as you reasonably can during this time and taking advantage of employer-sponsored retirement plans. If your company offers one, you should be taking full advantage of your 401(k) plan and make sure you’re maxing out your company contribution match if they offer one.
If your company offers a health savings account (HSA), you can also set aside money in your HSA on a pre-tax basis, giving you a source of tax-free income in retirement. “All these little steps come together to help,” Campbell notes.
“To understand your parent’s needs and your children’s needs, you first have to understand your own needs.”
Outside of work, Campbell suggests taking the “pay yourself first” mentality. Although it’s sometimes easier said than done, even setting aside a small amount from each paycheck can make a difference to funding your future. “Over time, with the benefit of compounded growth, you’ll find you’ve made progress towards your own retirement,” notes Campbell.
Protect your income and assets
If you’re part of the sandwich generation, one of the best things you can do is to mitigate or shift areas of risk exposure. That includes protecting your assets now and in the future.
What if you become unable to work and earn money for both yourself and your family? It pays to look into long-term disability insurance. Check to see if your employer offers it and if you can enroll or consider an individual long-term disability insurance plan. Having life insurance in place is also important. It’s part of estate planning that many people forget but can help protect the people you love when you’re no longer here.
Another risk area to consider is long-term care, for your parents as well as yourself. Long-term care needs tend to become more intensive and expensive as the person ages; the costs can add up quickly and most long-term care expenses aren’t covered by traditional health insurance or Medicare. One way to offset some of that financial burden is through long-term care insurance, which reimburses some of the expenses of long-term care. “This can shift the financial loss from yourself to a third party, safeguarding your own assets more,” says Campbell.
Taking a disciplined approach to your finances can help give you financial stability while also providing the help you’re able to give to those you love.
Thoughtful planning can make a significant difference in your financial approach to retirement.
Review 11 important factors in our retirement planning checklist.