By Aaron Kremer
For Virginia Business
They might have started out as the self-centered “me” generation. But these days baby boomers are feeling more like the “we” generation as they dole out money for their children’s college educations and help support aging parents at a time when they should be focusing on their own retirement.
No wonder they’ve been coined the “sandwich generation.” According to financial planners, many feel squeezed from both sides, and it’s having an impact on their future.
A recent study by Brightwork Partners conducted for Putnam Investments found that 20 percent of workers 45 and older are providing financial support to an elderly parent. Among these boomers, 42 percent say they will work during retirement and 26 percent say they will delay retirement. With longer life spans, the parents of some boomers may need assisted living or nursing home care for years, drawing down their funds. Their children may have to help pay the bills.
Meanwhile, on the other end of the spectrum, tuition at Virginia’s state colleges has risen as much as 10 percent some years. And the cost of private college can now cost upward of $40,000 a year for tuition, room and board.
Plus, boomers aren’t necessarily off the hook after a child graduates from college. Financial planners around Virginia say more people in their 50s are helping their kids with graduate school or the rent for their first apartment. And some young adults are returning to the nest after college, taking longer to decide on a career and become financially independent. The Brightwork Partner’s study found that 45 percent of those surveyed provide financial support to post-collegiate offspring (or grown child, if you prefer that oxymoronic phrase).
The challenge for boomers who have taken on these familial obligations is to not lose sight of their own retirement and to consistently set aside funds for their future. As Martin Shields, a financial strategist at JoycePayne Partners in Richmond, frequently reminds clients: “Your kids can take loans out and pay them off, and they’re investing in human capital. But you can’t take a loan out for retirement.”
To be sure, baby boomers are not a homogenous demographic. Some have inherited handsomely from their parents or are successful professionals who can afford to take care of a parent and pay their child’s college bills. But even financial advisers to the wealthy say the cost of familial obligations has risen and dented the size of potential inheritances. In fact, some boomers won’t inherit a penny. They’ll end up paying out of pocket for their parent’s care once parental sources are drained. Even if a parent qualifies for Medicare and Medicaid, those plans don’t cover things like dental expenses or a pair of new eyeglasses.
John Davenport, a senior portfolio consultant with the Actuarial Group in Richmond, has one client who thought she would leave money to the next generation. However, her mother, who is in her 90s, needs 24-hour care. “That’s $3,000 a month in addition to the nursing home costs,” says Davenport.
“That money was set aside for multiple generations, and now there is a real concern about how to pay the costs if she lives another four or five years.” Many boomers want to leave something to their children, a financial legacy so to speak, says Davenport. They can be devastated upon learning that funds will not stretch far enough to cover future generations.
Yet, not all experts agree about the impending doom of the so-called sandwich generation. A 2006 study in the Journal of Political Economy concluded that more than 80 percent of Americans seemed to be on track to retire with sufficient retirement savings. Others claim that the doom-and-gloom statistics are generated by the retirement savings industry and are meant to encourage people to set aside even more than they’d need.
There is one change that’s an advantage to the boomer generation: the potential to leave an inheritance without stroking a fat check to Uncle Sam. “Estate taxes used to wipe out a large percentage of money, but now we have a lot more money getting transferred down,” says Shields. An individual may currently leave $2 million to his or her heirs tax-free.
Saving vs. consumption
Still, the common refrain from planners is that if boomers want to leave an inheritance, they better start saving. Those at the younger end of the baby boomer generation are often not putting aside enough for retirement. They suffer from a lifestyle that encourages excess consumption. Retirees will be in for a rude surprise when they can’t afford the sort of lifestyle they envisioned. “There is a real behavioral issue there,” says Davenport. “If people began to plan and put pieces in place, they’re owning up to their own mortality, and that’s a piece we don’t want to activate. Very few people face up to that early in life. It’s just human nature.”
Daniel Bunting, a financial planner with the firm Bunting Capital Management in Hampton Roads, hosts a radio call-in show about financial planning. “The biggest dilemma is to get them to face reality,” says Bunting. “They’re spending too much money and don’t think retirement is a big deal. They’re going to find out they only have 30 or 40 percent of their income when they retire, and that’s a real shock.”
Compounding that situation is the fact that the baby boomer generation doesn’t save as well as the previous generation. So how much money should boomers be setting aside? That depends on the individual. Most people generally need 60 to 80 percent of their pre-retirement wages to sustain themselves in retirement without a major lifestyle change. That means if they were making $100,000 a year, they need a retirement account with $1.2 million if they can draw a 5 percent a year in returns, without digging into the principal.
If boomers are in the “sandwich squeeze,” with kids in pricey colleges and parents in pricey nursing homes, financial advisers recommend setting something aside for retirement no matter what. “The more time you have money in the market, the more time it can appreciate and compound,” says Davenport, adding that more time also equals more market cycles, which reduces the chances of drawing down an account during a down market (like now, for example).
“They’re not doing anyone any good if they’re not saving for retirement and not putting themselves in solid financial foundation,” adds Shields. “At that point they become a burden on their children.”
To bulk up retirement funds, Mary Beauchamp has a simple recommendation: work longer. The average age of retirement for men is 63; for women 62. A recent study by McKinsey Global Institute claims that working another two or three years would have a powerful impact on the retirement living standard of millions of boomers. “Learn to work longer and stick with it longer than you might have planned,” says Beauchamp, who owns a Norfolk fee-only financial advisory firm called LiveOak.
“That is sometimes not something a client wants to hear,” she admits. “But I encourage them to think about retirement as a gradual process instead of a given date.” Apparently working longer has another benefit. “The more physically active people are, the healthier and happier they are,” says Beauchamp.
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