Like any fan of nostalgic TV can attest, the middle child often feels neglected (“The Brady Bunch,” anyone?) Whether middle-child syndrome is sound science or pop psychology, clients of a certain age can still feel the way young Jan Brady did in the early 1970s — held captive between older and younger generations.
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Dubbed the sandwich generation, clients between 40 and 50 years of age can be pressured from two sides with financial and emotional burdens that involve caring for older, possibly ill, parents while also supporting their children, whether they are grown or not.
“When planning for the sandwich generation we spend a lot of time on conversations about who else they are caring for? Who else are you helping pay expenses for? Who else is important in your life?” says Angie O’Leary, head of wealth planning at RBC Wealth Management. “Asking these questions and finding out who else is a financial impact to the client is really important.”
These conversations can be difficult and clients may not be willing to discuss topics relating to their parents’ old age or letting their kids fend for themselves. But they’ve just got to “embrace the awkward,” says Jen McGarry, head of client risk prevention at RBC.
About 19% of adults currently assist an older family member in some way, according to a recent poll from RBC and Ipsos. Additionally, 21% of respondents say they offer financial assistance to a child over the age of 18. And parents in higher income households are most likely to be supporting adult children at 25%.
“Parents tend to underestimate by a long shot how much they still financially support their kids,” O’Leary says. “When you dig into it a little bit more, really understanding how much [clients] are going to need in retirement for their own expenses, you find out that some of that gap between what they’re spending on themselves vs. what’s not getting saved is going to their kids.”
Clients need to know it’s okay to say no to a family member if helping them out financially is going to be damaging to the client’s own retirement. But when it comes to family, emotions run high and loyalties run deep.
With that in mind, there are steps advisors can take to help secure their clients’ futures. First, contemplate developing an estate plan with structured considerations. This can include specific ages for distribution of funds, specific reasons or expenses for distribution of funds prior to said ages.
Advisors can also implement protections of funds for specific beneficiaries for special needs considerations — disabilities or substance abuse — “especially if there is a need to preserve the right to potential government benefits,” says advisor Sandra Adams of Center for Financial Planning.
Estate planning considerations for older adult parents could include the same special needs trusts language to allow access to eligibility for Medicaid and/or veteran’s benefits, Adams notes. Should the need for-long term care arise, paid caregiver contracts allowing for the adult child to provide care to a parent would be helpful for both parties.
Advisors should assure clients confirm any aid given fits into their financial plan. From an estate planning or tax planning perspective, clients will want to give only as much as the annual gift exclusion each year, Adams says. She advises this as a way to provide boundaries and limitations in order to protect everyone involved.
This approach keeps “the parents from harming their own financial plans and from feeling guilt for not giving more. It also keeps the children from demanding more and from leaning too much on their parents, when they need to learn to be independent and learn to make it on their own,” Adams says.
Emphasizing flexibility within the retirement plan is another way to go, RBC’s O’Leary says. Having liquid assets, or for the high-net-worth client a line of credit against the portfolio, can help alleviate some of the pressures of financially supporting family members.
Clients can generally borrow between 60% and 70% of their after-tax portfolio, O’Leary says. But this depends on the portfolio’s composition. For instance, it may be higher if the portfolio is more conservatively allocated, or lower if there are riskier assets involved.
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“We recommend staying well below these limits, particularly if borrowing long-term,” O’Leary says. “If borrowers have a need that requires borrowing closer to the maximum limits, we recommend it be for more shorter-term liquidity needs and that there’s a clear financial plan in place with the advisor for how the client will pay it down.”
A clear understanding of the risks to the portfolio is a necessity whenever a client is borrowing against it, she says. “This is a conversation that borrowers should be having with their advisors.”
Planning for the sandwich generation is a game of financial offense, says advisor Rob DeHollander of the DeHollander and Janse Group. He has clients prioritize retirement planning first, then kids’ college and finally elder care.
“The three elements of that are making sure [clients] have enough resources for themselves, planning for college education with a 529 plan or similar vehicle, and third, making sure they’ve had that awkward conversation with their parents to make sure their affairs are in order and including their assets in a conversation around long term care insurance, or another type of hedge against cost of care,” DeHollander says.
Another issue to consider: when it comes to elder care, advisors and clients have to be vigilant around abuse and fraud, which is rampant in the U.S. Elderly Americans are losing $37 billion a year, according to one Bloomberg report, as a result of targeted scams. Another thing to keep in mind is the possibility of cognitive decline, not just for someone a client is caring for, but for the clients themselves.
There is a push in the industry right now, DeHollander and the other advisors say, to make sure clients have a trusted contact for each account.
This way if a client makes decision about some funds that the advisor finds unusual or out of character, they can then call that trusted contact and make them aware of the situation in case there is something medical going on. Tying in the emotional element of all this is what creates and engages action on the part of the client, DeHollander says.
“Clients don’t make decisions based on numbers, Sharpe ratios and alphas and betas, they make it based on emotion and then they justify it with the numbers,” DeHollander says. “Especially when you’re talking around these really sensitive issues. You need to put the client in a context where they are sort of in that moment: “How are you going to feel when your son walks across the stage with a college degree in his hands?” and maybe there is a six-year-old in the house. “How are you going to feel when your parents age and diminish and they can’t care for themselves anymore? What do you want to happen at that time? Well, you need to plan for that today.”
