The “Sandwich Generation” has nothing to do with when you were born. It simply means that you’re providing support to two generations: your aging parents and your children.
Here we’re looking specifically at the financial implications of providing such support.
Before you examine your parents’ and your children’s financial needs, you first need to understand your own. Start by assessing your monthly income sources and expenses. Then consider what you need to contribute to your own retirement to guarantee you won’t become a burden on your children in the future. In a healthy situation, what you have left is how much you can make available to support others.
Unfortunately, that’s not how “available support” typically works. And that’s because of the uncertainty of life’s curve balls.
Yes, you can estimate a target date of when you’d like to retire. But when will your children need financial support? Other than scheduling help with college costs, their financial needs can come at any time – resulting from a job loss, a divorce or a medical crisis, for example.
As for your parents, their needs can also come as a surprise. Maybe it’s when you discover that they overestimated their nest egg or underestimated their living expenses. Or they have extraordinary medical or long-term care needs. Or they miscalculated how the loss of one parent impacts the retirement income of the surviving parent.
Let’s look at how widowhood affects the role of the Sandwich Generation.
Understanding widowhood finances
Life expectancy in the U.S. has increased, with many more people living into their 80s and 90s. So, not only are Sandwich Generation adults dealing with one parent being widowed; they may even be dealing with widowhood themselves.
When widowhood affects your parents: One parent becoming widowed could cause a temporary cash shortage as names are changed on accounts, beneficiaries are paid out, and assets are processed through probate. But that period will pass.
What will have a longer-term impact is the “Widow’s Penalty,” where adjustments from “married filing joint” to “single” are not proportional.
Your widowed parent’s expenses may stay about the same or slightly lower. But investment and property rental income, for example, will remain constant. And required minimum distributions (RMDs) from tax-sheltered retirement plans won’t change unless the surviving parent is much younger and pays a smaller percentage of the balance.
But in the case of a two-Social-Security-check couple, the smaller of the two checks will be lost. And the standard deduction for a single person is far less than for a married couple. So adjusted gross income could actually go up.
Then, your surviving parent’s Social Security benefits could go from non-taxed to taxed because the taxation trigger is lower for a single person’s benefits.
And although the IRS gives a widowed person one year of grace – allowing a year of “married filing joint” – in the second year, that changes. And when shifting to the single tax tables, tax-bracket thresholds occur at lower dollar values. So even if the taxable income remains the same, it will be taxed at a higher rate.
Two other costs could increase: the trigger levels are lower for singles for the 3.8% surtax on net investment income and the impact of IRMAA on Medicare Parts B and D premiums.
Unless all these implications were considered in your parents’ retirement planning, you might be called on to step in and make your surviving parent whole – for the rest of their lives unless living expenses can be reduced.
When the widow is you: You will face the exact same implications if you become widowed. Not recognizing this financial curve ball could affect your ability to continue funding your own retirement – and it could reduce what is available to help your children or your already-retired parents.
In either case, being able to care for aging parents and your children – while still preserving financial well-being – requires following a careful strategy.
Knowing your parents’ finances
Broaching the topic of finances with older family members is exceptionally touchy. Maybe a conversation about your parents’ preferences regarding their future care can evolve into discussing how to pay for it. Or a trusted financial advisor might be brought in to facilitate the conversation. But somehow, it needs to take place – to reduce everyone’s stress and help you prepare.
Parents’ living expenses should be broken down into “essential” (housing, food, transportation and insurance) and “discretionary” (mostly lifestyle-driven, including entertainment and travel) and matched to guaranteed or market-driven income. Next come health care and long-term care plans. With just this information, you can already start understanding how vulnerable you are to having to help.
Funding yourself first
Remember the saying, “In an airplane, put on your own oxygen mask first, so you can help others do the same”? Being available to care for multiple generations is no different.
It may feel selfish to put your future financial security needs at the top of your list. But by doing so – and by starting long before you find yourself sandwiched between generations – you have the greatest chance of having the resources to be a genuine help.
How do you do that? Maximize savings, take full advantage of matching in employer-based 401(k) plans and consider health savings accounts (HSAs). Explore insurances that protect your income and your assets. And above all, don’t use your retirement savings (as loans or early withdrawals) to support your parents or kids.
And ask for help. Online research is not your only tool. Seek support through local advocacy groups that can help educate you and provide connections to valuable resources. Or initiate a relationship with a trusted financial advisor who can help you set goals and show you how to fund your ability to reach them.
An important message for those in the Sandwich Generation: supporting others should not mean sacrificing your own financial well-being. And by addressing the issue head-on, you won’t have to.
For more information on a wide variety of financial topics, please explore our resources and guides page.
This article originally appeared in Old Colony Memorial