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Develop a life plan

Financial foresight helps with your “sandwich” needs

by Joan Tupponce

The call that Kevin Deckert received in early November 2007 wasn’t one he’d anticipated. His mother had suffered a stroke and lost cognitive functions. “The damage to her brain was so serious that it shut down and eventually shut down her body,” Deckert says.

Deckert’s mom was only 71 when she passed away a few days later. Her death forced Deckert, president and CEO of Deckert Leahy, a fee-only private wealth management firm, to face the realities of being a member of the sandwich generation. “I now have a father who is 82 and I also have a senior in high school,” says the baby boomer. “By the time my son is through college, my father will be 86.”

The sandwich generation, aptly named because they are sandwiched between two generations, faces three monumental tasks — preparing for their own retirement, saving for their children’s college education and caring for aging parents. “The idea of trying to financially deal with all three circumstances is a huge undertaking, both emotionally and physically,” Deckert says.

Work the plan

The best way to deal with situations that can play havoc with your financial portfolio as well as your well-being is to prepare. Have a plan that you can follow. “If you fail to plan, the crisis is worsened,” Deckert says. “Planning is the most critical element. You must develop a plan, gather information and work with an adviser. Some parts of the plan need to be implemented today. You need to know what you will do long before it occurs.”

Unfortunately, many people in the sandwich generation haven’t prepared. When clients are faced with these types of issues, Martin Shields, financial adviser for Joyce Payne Partners, asks them to list their goals and priorities. “By going through that exercise, they know what their issues are.”

Your parents’ needs

Shields finds that a top priority for many people in this generation is dealing with their parents’ needs. “Usually, there are health issues that lead to financial issues,” he says. “The expenses they incur are larger than they anticipated. It often comes down to long-term care, which can run from $60,000 to $90,000 a year.”

It’s important, adds Lou Crafa, assistant vice-president of investments at Wachovia Securities, to “sit down and have a conversation with your parents about what planning they have done. Find out if they have any long-term care insurance and if not, should they buy it? They should look at financial planning in terms of protecting their assets.”

Planning for the future can take many forms. Adults in the sandwich generation who have the financial means, for example, can purchase long-term care insurance for their parents. “I’ve also seen adult children sell their parents’ home and put an addition on their home so they can bring their parents there,” Deckert says. “As another example, we have one client now who is looking at a reverse mortgage for his parent, who wants to remain in her home.”

Many emotional issues come into play when adult children have to care for their parents. Those issues can range from talking with their parents about selling the family home to cutting back on their own expenses so they can financially care for their parents. “In the case of children with limited financial means, we suggest they hold off on their charitable inclinations so they can help their parents,” Shields says. “We try to also talk about different expenses that are discretionary and the possibility of foregoing them for a couple of years while they are dealing with their family situation.”

Your needs

Before they can deal with how they are going to handle their children’s educational needs, members of the sandwich generation need to focus on their own retirement, especially if they haven’t saved for it. “You can’t take out a loan for retirement, but you can take out a loan for your child’s education,” Shields says.

One of the best ways to save money for retirement is to max out your 401(k) plan at work, to the extent that is available through your employer. “You want to contribute to your 401(k) plan to the point of being matched by your employer. The maximum contribution in 2008 is $15,500,” Shields says. “People who are 50 and older can put in an additional $5,000. They should definitely be doing that.”

“Pay yourself first,” is the adage Deckert goes by. “That is the mental image you need to have,” he says. “By setting that money aside, you learn to live on the balance.”

Roth IRAs, recommended by financial advisers, are solid savings investments. You can contribute $5,000 a year and an additional $1,000 as catch-up per person if you are over the age of 50, as long as your modified adjusted gross income is not in excess of $160,000, if you are married; $110,000 if you’re single. “Your money grows tax deferred and when you take it out, it’s tax-free,” Deckert says.

As you get closer to retirement, it is important to begin moving your money into more conservative investments. “Even as you start to reduce some of the risk associated with your investments, you want to keep a portion in something that will continue to grow,” Shields says.

Your children’s needs

When it comes to planning for your children’s education, advisers agree that Section 529 plans (named after the IRS code) are important tools. The tax-advantaged savings plans - there are two: pre-paid and savings are administered by each state. The Virginia College Savings Plan offers the Virginia Education Savings Trust (VEST) and the Virginia Pre-Paid Education Plan (VPEP).

“Section 529 plans allow parents to set up a higher education funding program that they can access and use to build assets for their child’s education,” Deckert says. “The child does not own the assets; he or she only has a beneficial interest. [The plans] are controlled by the parent or grandparent. You can set most of these up at any time in your child’s life.”

Although money put into the plans is not deductible from federal income taxes, it is often deductible at the state income tax level. Money invested in a 529 plan grows tax deferred. “Any money you put in as it grows is a tax-free investment,” Shields says. “If you pull it out for qualified education costs, there is no income tax on it, or capital gains tax.”

A well-planned college strategy can save you thousands of dollars. “There are many viable options when it comes to financing your child’s college education, so it’s important to understand how the system works and get through the college years with your finances intact,” says Thomas Leahy, president of Campus Financial, a Richmond-based financial planning firm specializing in college planning, as well as vice-president and COO of Deckert Leahy.

Leahy believes parents shouldn’t shy away from loans. “Look at loans as an opportunity to let your assets grow while using borrowed funds,” he says. “Depending on the market and interest rates, it could work out to your benefit.”

Take care of yourself first

Regardless of what you’re dealing with, Crafa believes you should take care of your own finances first. “Author Carol Abaya says ‘Life can only be understood backward, but it must be lived forward,’” he quotes. “Trying to anticipate these sorts of things is difficult, and most people do not plan enough for this. If you don’t take care of yourself, there is no backup. The key is to save as much as you can and as easily as you can. Then these problems will be less stressful and easier to handle.” Boomer Life Magazine

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Joan Tupponce is a national award-winning writer who writes for local, regional and national publications.