Money strategies for the sandwich generation

Balancing priorities when caring for a multi-generational family

If you're busy raising kids and helping your parents too, you're not alone. Tens of thousands of Canadians between the ages of 45 and 64 find themselves splitting their time, energy – and money – caring for their children and parents (or other relatives). If you belong to this "sandwich" generation, it can be a difficult balancing act.

Everyone's circumstances are different and your priorities will reflect that. Maybe you have a young family, a mortgage, and parents nearby who only require occasional assistance. Your focus might be on saving for your children's education, paying down debt, and setting aside a few hours each week to help out your parents.

Or, perhaps you're close to being debt-free, but have parents living far away with little saved and have just had an adult child move back in. You'll likely be directing some of your extra monthly income to parental care and asking your boomerang child to chip in at home.

If you aren't sandwiched yet, think about how soon you might face this challenge and how long those obligations could last. Early planning can go a long way to easing emotional and financial strain.

Helping out your parents

Understanding your parents' needs, goals, and resources is a first step to managing a sandwich situation. Although discussing money can be a delicate matter, open communication is essential. Here are some topics to explore:

Financial inventory

Start by getting an understanding of your parents' assets, income sources, living expenses, and debts. If they have pension income, substantial home equity, and are otherwise debt-free, the options will be quite different than if you have to support them financially. Also, know where important documents are kept so you can access them if and when necessary.

Living arrangements

Some people look forward to downsizing when they retire. Others want to stay in their homes for as long as possible. Either way, there are ways to unlock home equity to fund living and care expenses, or invest for income.

Selling and then purchasing a smaller home is an obvious way to free up cash. But there are other choices too, particularly for those who wish to stay put.

A home equity line of credit lets a homeowner borrow at rates that are among the lowest a financial institution has to offer. Another option is a reverse mortgage which allows a homeowner to convert a portion of their equity to cash and doesn't require regular interest payments. The debt is repaid when the homeowner sells or passes on. However, a reverse mortgage depletes the owner's equity over time and the cost of financing can be higher than with a line of credit.

Long-term care insurance

Even if your parents are planning to stay in their home, the reality is one day they may not be able to. The monthly cost of private nursing home care in BC ranges from $3,000 to over $8,000 depending on your parents’ needs, the facility, and the community they live in. This can be a challenge to fund, even for those with deep pockets.

Long-term care insurance can be a solution to future care costs, and benefits cover a range of personal care and health-related services.

Estate planning

What if your parents become incapable of managing their own affairs? For you to act on their behalf, they will need to legally designate you as their representative. In BC, the broadest powers are through a representation agreement, which will enable you not only to act in their financial and legal matters, but make health care decisions as well.

Another option is Power of Attorney, which enables your parents to give you or another person the authority to act for them in financial and legal matters while they are alive. This should not be confused with a will, which only covers legal affairs after someone has passed away.

Whichever option you use, make sure the legal documentation is current and valid as it will greatly assist you in dealing with hospitals, banks, and government services during a stressful time.

Life insurance can be valuable in protecting the value of your parents' estate. Since most assets are considered disposed of when you pass away, capital gains taxes can come into play. Older people often have significant accrued capital gains, such as on a second home or investment portfolio, which are at risk of taxation upon death. A tax-free lump sum benefit from a life policy can cover a potentially sizeable tax bill, with only a relatively small outlay in premiums.

Saving for your kids' education

If you're a sandwiched parent, stretching your savings to build enough for your kids' future education can be difficult. An RESP can help. Over a plan's life, you can contribute up to $50,000 per beneficiary and receive another $7,200 in free grant money from the government. And it all grows tax-free. This makes an RESP an educational savings tool that's hard to beat.

Steering the course to financial independence

It’s only natural for parents to want their children to be successful in all aspects of their lives, although waiting for success to arrive can be stressful at times for everyone. Surveys have revealed that nearly a quarter of parents who provided financial assistance to adult children were disappointed that such subsides were necessary.

Whether your kids are living at home to minimize post-secondary debt or saving for a down payment on their first place, you may be feeling the financial pinch. Help ensure your children's lasting success by teaching them sound financial principles. Your financial advisor can provide guidance and resources for developing personal budgets and financial goals for your adult children. Having a proactive plan in place can be the key to family harmony.

Protecting your income

Protecting income is wise for any family, but it's especially true if you have multiple generations counting on you. Life insurance should be a given, with enough coverage to take care of major obligations like your mortgage and fund the future living expenses of your loved ones.

Since statistics show the average working person has a much higher chance of becoming disabled than dying, you should also consider disability and critical illness protection. Your advisor can work with you to identify your priorities and get you the most coverage for your budget.

Keeping sight of your own goals

Being pulled in many directions comes with being a member of the sandwich generation, but it's important to not lose sight of your own needs and goals.

If dipping into your retirement savings for extra cash to pay some bills or cover educational expenses is a little tempting, wait. Keeping your RRSP intact is one of your best assurances of a secure retirement and helping you to avoid becoming a burden to your own children down the road!

To help manage your RRSP, consider setting up automatic contributions. When there are competing priorities for your money, it's easy to let a year's contribution go by. Contributing even a small sum regularly will keep your plan growing.

Have family responsibilities caused you to cut work time, impacting your income? It still can make sense to contribute to your RRSP to get your money sheltered, but delay claiming the tax deduction until your earnings return to normal. You'll get a bigger tax benefit later.

Finally, don't overlook ways to increase your monthly cash flow. Start with your mortgage. Although paying off your home as fast as possible is the best course over the long term, stretching out your mortgage's amortization for a while can lower your payments. Use your tax refund to pay down some principal. Or, blend and extend your mortgage term if it lowers your interest rate. Above all, make getting rid of high-cost, non-deductible debt like store and credit card balances a priority.

We've presented a number of strategies to deal with both your aging parents and your growing children. To help decide which options are best for your particular circumstances, talk to your BlueShore Financial financial advisor.