Advisers can help ‘sandwich generation’

More than one-third of affluent Americans financially support their children and parents while trying to maintain and build upon what they have set aside for retirement, according to an April 2010 Merrill Lynch Affluent Insights Quarterly survey.

Most of these “sandwich generation” individuals are baby boomers in their 40s, 50s and 60s. Advising them on financial matters spanning three generations can be complex and requires heightened sensitivities to family dynamics.

Many of these boomers work full time while raising a family or supporting kids in college, and many already serve as primary caregivers to one or both parents. To ease the stress brought on by balancing these competing demands, financial advisers may need to encourage their clients to do some soul-searching to identify their core values and priorities and, if appropriate or requested, help them in this process.

Discussing the financial impact of diminishing health and eventual loss of loved ones, as well as trade-offs that may affect an individual or couple’s lifestyle, can be painful topics more easily put off until another day, but the reality is, that day will often come too soon and leave clients unprepared.

When considering trade-offs, the Merrill Lynch Wealth Management survey of affluent households — those with at least $250,000 in investible assets — found that among those where the sandwich generation individual or couple is 51 to 64, 45% said that they are making lifestyle sacrifices to support their family’s needs. In fact, 44% said that they have significantly cut back on personal luxuries, and 26% said that they are saving less for retirement.

TRADING PLACES

These circumstances may resonate most as individuals face difficult choices about how best to care for aging parents — often assuming full responsibility for their medical and financial decisions over time. Although older Americans recognize the physical and mental limitations that come with aging, they still battle with relinquishing independence and asking for help, potentially creating a power struggle with their boomer children.

Advisers should suggest to family members that they try to open the lines of communication early on to ensure that everyone’s needs and preferences are understood and respected.

Another important role that an adviser can play is to help a client get the affairs of aging parents in order before a life-changing event occurs.

With this in mind, family members should know where important financial and medical documents are, and the names of their parents’ doctors, advisers and lawyers, to get a sense of the quality of care and advice that they are receiving, and at what cost. They may also consider consolidating parents’ assets spread across multiple financial institutions for easier management and monitoring.

Depending on where they live and the type of care they require, annual long-term-care costs for aging parents can exceed $75,000, with certain costs not covered by health insurance or Medicare. Knowing ahead of time what kind of assistance parents may need allows for greater planning and can help prevent boomers from endangering their own financial wellness.

Much can be learned from being involved in the lives of aging parents. By analyzing those parents’ financial difficulties and the strain that they may place on the rest of the family, boomers can discuss with their advisers how to avoid similar mistakes and shield their own children from such experiences.

NEXT GENERATION

When parents from the survey between 35 and 50 were asked in April what aspects of their financial lives they could most use help in figuring out, financing their children’s education ranked second only to determining how much they would need to retire. There are multiple options to help parents save for education; the key is to start saving early and often.

The good news for kids is that while sandwich generation parents are seeking trade-offs and making sacrifices, just 12% said that they are cutting back on contributions to their children’s college education.

Although aging parents can be resistant to handing over financial controls, children of the affluent sandwich generation can be just as resistant to taking them as they become adults. Advisers should offer their clients tips to help them teach children the skills necessary to embrace financial independence, such as budgeting, the appropriate use of credit and the importance of saving for retirement as early as possible, even if little can be set aside initially.

When appropriate, an adviser may also suggest that parents bring their children to a discussion with the adviser about managing finances when first starting out on their own.

It can be easy to let the needs of those you love take priority over your dreams. However, inadequately preparing for the future can be a disservice not only to an individual or couple but eventually their children, too.

A nest egg may need to sustain today’s retirees for at least 20 or 30 years, based on current average life expectancy; therefore, it is critical that they have retirement plans to help stay on track.

Although every situation is different, maximizing contributions to tax-advantaged vehicles such as individual retirement accounts and 401(k) plans can play a big role in retirement — perhaps increasingly so as declines in income produced from pensions and Social Security continue.

PROPER ASSET ALLOCATION

Advisers should review investments held in these vehicles with their clients at least annually to ensure that proper asset allocation strategies are being applied based on life stage, family circumstances, goals and risk tolerance. Also, if home financing is to be part of the financial landscape in retirement, as that time nears, refinancing may improve cash flow or guard against interest rate volatility in later years.

THREE-PART STRATEGY

However, for most affluent households nearing retirement, these assets represent only a portion of retirement income sources within a larger pool of savings and investments for which we recommend a retirement income investment framework that approaches portfolio strategy from three dimensions working in concert.

The first portfolio is aimed at near-term expenses and those likely to be present in retirement, such as basic household budgeting, college tuition and assisting with parents’ medical or living expenses. This “consumption” portfolio is composed of cash and other liquid and fixed-income investments.

For example, dividend-paying securities offer an opportunity for growth while providing timely income. This short-term portfolio should hold enough assets to fund at least two years of expected consumption.

The second is an intermediate-term portfolio designed to generate returns over a longer period of time and to harness growth opportunities in the markets, while offering a pool from which a household can judiciously draw funds when assets in the consumption portfolio need to be replenished. It comprises investments from a well-diversified mix of major asset classes, including equities as well as fixed income.

Finally, for longer-term goals such as leaving an inheritance or philanthropic legacy, a third portfolio is invested in asset classes designed to deliver optimal growth potential over an extended time horizon.

REVIEW STRATEGY

With this approach, advisers can work with clients to develop a strategy that addresses their specific short-term needs alongside their retirement vision, helping them understand how much risk they might need to take to reach certain goals.

Once a sound strategy is in place for managing and monitoring retirement assets, spending needs can rise or fall year to year, especially in light of shifting economic conditions and tax laws. Therefore, it is essential that households review their strategy with their adviser and other professionals, such as their attorney or certified public accountant, at least once or twice a year and make necessary adjustments.

REDEFINING RETIREMENT

In previous generations, traditional retirement often meant a pension, Social Security, limited personal savings and a life of leisure. Not anymore.

Today, studies everywhere tell us that many boomers are rejecting the traditions of their parents or grandparents. Instead, they are choosing to alternate between periods of work and leisure, staying more mentally active and engaged.

This approach can allow savings and investments to compound for additional years, thus delaying the need to tap as deeply into other retirement income sources.

According to our survey, 54% of the members of the sandwich generation work with an adviser, and among them, 32% wish that they had started working with one sooner. Among the remaining 46% who don’t work with an adviser, the vast majority — 83% — think that they would benefit from such a relationship.

Depending on an adviser’s years of experience, he or she may work with dozens of sandwich generation clients and should now to avoid a “one size fits all” approach.

What these individuals and families really need is someone to help them honestly and holistically address their changing priorities and some of life’s greatest financial challenges.

Lyle LaMothe is the head of U.S. wealth management for Merrill Lynch Global Wealth Management, and Andy Sieg is the head of retirement and philanthropic services for Bank of America Merrill Lynch.