Money strategies for the sandwich generation
By: Scott Evans
If you’re busy raising kids and supporting your parents too, you’re not alone. Statistics Canada reports that over 700,000 Canadians aged 45 to 64 are splitting their time and money caring for their children and parents. If you belong to this sandwich generation, it can be a difficult balancing act.
Everyone’s circumstances are different and your priorities will reflect that. Maybe you have a young family, a mortgage and parents nearby who require occasional assistance. You might be saving for your children’s education, paying down debt and setting aside a few hours each week to help your parents.
Or, perhaps you’re close to being debt-free, but have parents living far away with little saved and have just had an adult child move back in. You’ll likely be directing some of your income to parental care and asking your child to chip in at home.
Whatever your situation is, planning ahead can go a long way to easing emotional and financial strain.
Helping out your parents
Understanding your parents’ needs and resources is the first step to managing a sandwich situation. Here are some topics to explore with them:
Gain an understanding of your parents’ assets, income sources, living expenses and debts. If they have pension income, substantial home equity and are otherwise debt-free, the options might be quite different than if you have to support them financially. Also, know where important documents are kept so you can access them if necessary.
Some people look forward to downsizing when they retire, while others want to stay put. Either way, there are ways to unlock home equity to fund living and care expenses, or invest for income.
Selling and then purchasing a smaller home is an obvious way to free up cash. But there are other choices too, particularly for those who wish to stay put. A home equity line of credit lets a homeowner borrow at rates that are among the lowest a financial institution has to offer. Another option is a reverse mortgage, which allows a homeowner to convert a portion of their equity to cash and doesn’t require regular interest payments.
What if your parents become incapable of managing their own affairs? Meeting with an estate specialist to ensure you have the proper legal documents in place will be key to handling affairs in the future. A power of attorney, updated will and representation agreement are among the documents recommended to ensure your parents wishes are acted upon and can make dealing with hospitals, financial institutions and government services much easier during a stressful time.
Life insurance can be useful in protecting the value of your parents’ estate. Since most assets are considered disposed of when you pass away, capital gains taxes can come into play. Older people often have significant accrued capital gains, such as on a second home or investment portfolio, which are at risk of taxation upon death. A tax-free lump sum benefit from a life policy can cover a potentially sizeable tax bill, with only a relatively small outlay in premiums.
Saving for your kids’ education
If you’re a sandwiched parent, stretching your savings to build enough for your kids’ future education can be difficult. A Registered Education Savings Plan (RESP) can help. Your contributions grow tax-deferred until withdrawn and the federal government can add to your savings with education grants for each of your children. When the funds are withdrawn for school they are taxed in the student’s hands, typically at a much lower rate.
Protecting your income
Protecting income is wise for any family, but it’s especially true if you have multiple generations counting on you. Life insurance should be a given, with enough coverage to take care of major obligations like your mortgage and fund the future living expenses of your loved ones.
The Canadian Life and Health Insurance Association reports that on average 1 in 3 people will be disabled for 90 days or more at least once before age 65, so don’t forget to consider disability and critical illness protection. Work with an advisor to identify your priorities and get the best coverage for your budget.
Keeping sight of your own goals
Being pulled in many directions comes with being a member of the sandwich generation, but it’s important not to lose sight of your own needs and goals.
To help manage your RRSP, consider setting up automatic contributions. Contributing even a small sum regularly will help keep your plan growing.
Don’t overlook ways to increase your monthly cash flow. Start with your mortgage. Although paying off your home is the best course over the long term, stretching out your mortgage’s amortization for a while can lower your payments. Make getting rid of any high-cost, non-deductible debt like store and credit card balances a priority.
There are many options for the sandwich generation and a financial advisor can help you create a plan and implement the best strategies for you and your family.