Got competing financial priorities?

How to balance the needs of kids, aging parents, and your own retirement.

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As if trying to meet day-to-day expenses while saving for retirement and paying for college isn't enough, now many people find themselves increasingly responsible for the physical, emotional, and even financial challenges of caring for aging or disabled parents. Welcome to the sandwich generation—a growing part of the population feeling a financial tug from kids on one side and parents on the other.

If this sounds familiar, you have plenty of company. According to the Pew Research Center, one-in-seven middle-aged adults (15%) is providing financial support to both an aging parent and a child.1

Why are so many of us feeling financially sandwiched? On one hand, people are living longer, having children later, and continuing to support adult children (“boomerang kids”) who find it too expensive to live on their own. On the other hand, several years of rough economic/financial market conditions have dented the home and investment values of today’s elderly, to the point where they’re having trouble making ends meet in retirement.

Pump up your planning to care for aging parents.

Facing financial obligations from both sides (whether actual or potential), members of the sandwich generation can best cope by “planning, planning, and planning some more,” says Eric Gold, behavioral economist at Fidelity Investments. “Kids and aging parents come with a lot of ambiguity, which can cause paralysis,” he says. “Rather than becoming overwhelmed and doing nothing, ramp up your planning and save more for uncertainties despite the ambiguity.”

If you have two sets of dependents leaning on your financial house, it is important to make sure it’s sturdy. “Fund your emergency cash reserves, avoid or pay down debt, and, above all, do all you can to make your own retirement saving a top priority,” says Ann Dowd, CFP®, a vice president at Fidelity Investments. “Though emotions can sway you to support loved ones first, they’re not responsible for your retirement security—that’s your job.”

Here are some strategies to strengthen your sandwich-generation finances.

Know more.

Even though it can be challenging to talk with your parents and kids about financial realities, it may be best to do so early on. If you wait until a financial or medical crisis forces you to action, you may not have the time or flexibility you would have if you had planned for it.

Dowd says it’s easier to plan for the goals and risks that you know about, so it makes sense to “find out about your parents’ total financial picture, from essential living expenses to sources of income and insurance, so you’ll know whether you need to fill in any gaps.” For expenses, talk with them about their essential living costs (housing, food, transportation, insurance) as well as their discretionary costs (lifestyle choices), to see what they can realistically afford.

In terms of income, find out about reliable sources of income such as pensions, Social Security benefits, or an annuity income, if they have any. Just as you’ll do for yourself someday in retirement, help them match their essential expenses to steady sources of income.

Finally, check into their health care plans. Make sure they have a health care proxy and a living will in place to help manage their care; get the details on their health and long term care insurance to see whether they can cover their medical expenses; and find out whether there are funding resources available if they need nursing home, assisted living, or home health care. If you’re not factoring health care costs into your retirement savings strategy, you could be setting yourself up for a nasty financial shock. According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $245,0001 (in today’s dollars) to cover medical expenses throughout retirement.2

Think of it this way, says Gold: “When you’re caring for aging parents, the boundaries between your financial plans and those of your parents start to disintegrate.”

Save more.

Given the financial uncertainties faced by the sandwich generation, it’s even more essential to save as much as possible. This is especially true if you have to take time off work—and miss some income—to care for your parents. Be sure to take advantage of any and all tax-advantaged saving vehicles.

Take care of your retirement first—“Pay yourself first by continuing disciplined saving through your workplace retirement plan,” advises Dowd. Even if you merely contribute up to the company match, at least you’re not leaving “free money” on the table.

If at all possible, don’t use your retirement savings—whether through loans or early withdrawals—to support your kids or parents. Dipping into your nest egg not only sacrifices the potential for tax-deferred growth, it could also leave you inadequately prepared for retirement and force your children to support you financially. That’s a cycle you want to break.

Prep for college costs—If you don’t have one already, consider opening a 529 college savings plan account as soon as possible, and have family and friends contribute to the plan for birthdays and holidays. These plans offer tax-deferred growth and federal income tax-free withdrawals for qualified higher education expenses. What’s more, the sooner you start and the longer you stash away college savings, the less you have to worry about a potential conflict between supporting your parents and paying for college.

Also, “Keep an open mind about college choices,” says Dowd. “Many colleges offer competitive programs with a price tag that might fit better with your sandwich finances.” According to the College Board, the average annual cost (tuition, fees, and room and board) for a four-year, in-state public college is $19,548 for the 2015–2016 tuition year, and $43,921 for a four-year private college.3

Look for tax savings on your family expenses—Your employer might offer tax-advantaged programs such as flexible spending accounts that let you pay for eligible out-of-pocket health and dependent-care expenses with pretax dollars.

If you are eligible, a health savings account (HSA) lets you save pretax, and lets you withdraw principal and earnings free from federal taxes. That’s true as long as you’re paying for qualified out-of-pocket medical expenses.

Similarly, your employer may offer access to a dependent care spending account (DCSA) that lets you put away money, pretax, to pay for child or adult dependent care—though for elder care you and your parents have to meet income eligibility and support requirements to qualify. While the tax savings may help, keep in mind that any contributions you don’t use during the current year will be forfeited.

Even if you don’t have access to a DCSA, you may be able to take advantage of the Child and Dependent Care Credit. Learn more about the tax credit from IRS publication 503.

Protect more.

Proper insurance coverage could keep your parents’ care needs from burdening you financially, could keep your care needs from doing the same to your children, and could protect your family in case you are unable to keep supporting everyone. Long term care insurance may be appropriate at this point for you and your parents. In both cases, this depends on many factors, including age, cost of coverage, how long you might need coverage, and the types of benefits you want.

If you or your parents need long-term care, having insurance could cover some of the costs of care and keep from depleting their savings. Consider that the average annual costs for nursing home or assisted living care are $81,030 and $42,600, respectively.4

Finally, with the needs of multiple generations on your shoulders, protecting your family from the risk of your disability or death may be more important than ever. Disability and life insurance can help make sure that your loved ones are cared for in the event that you are unable to work.

No doubt, the sandwich generation faces competing financial priorities. To keep your children and aging parents from pulling your finances apart, plan more diligently, save more carefully, and keep your retirement saving a top priority. For all concerned, that may mean adjusting expectations—from when you retire to where your kids go to college to how your aging parents spend their golden years. Then again, you’re all in this “sandwich” together.

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The UNIQUE College Investing Plan, U.Fund® College Investing Plan, Delaware College Investment Plan, and Fidelity Arizona College Savings Plan are offered by the state of New Hampshire, the Massachusetts Educational Financing Authority (MEFA), the state of Delaware, and the Arizona Commission for Postsecondary Education, respectively, and managed by Fidelity Investments. If you or the designated beneficiary is not a New Hampshire, Massachusetts, Delaware, or Arizona resident, you may want to consider, before investing, whether your state or the designated beneficiary's home state offers its residents a plan with alternate state tax advantages or other benefits.
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1. 2015 Fidelity analysis performed by its Benefits Consulting group. Estimate based on a hypothetical couple retiring in 2015, at 65 years old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees but may be more or less depending on actual health status, area of residence, and longevity. The Fidelity Retiree Health Care Costs Estimate assumes that individuals do not have employer-provided retiree health care coverage but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care. Life expectancies are based on research and analysis by Fidelity’s Benefits Consulting group and data from the Society of Actuaries, 2014.
2. The Fidelity Retiree Health Care Costs Estimate assumes that individuals do not have employer-provided retiree health care coverage but do qualify for Medicare, the federal government’s insurance program. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services, and long-term care.
4. "Market Survey of Long-Term Care Costs," 2012, MetLife Mature Market Institute.
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