The Growing Challenge for the Sandwich Generation

More and more, registered investment advisers are having to counsel clients on how to juggle eldercare and boomerang children.

Every wealth manager out there knows the old saw about making sure that clients put their own oxygen mask on first. In practice, however, it can be tough to persuade clients to place their own financial security ahead of the needs of aging parents, adult children and grandchildren.

Wealth managers say that clients’ financial commitments to family members — whether as a result of a sense of obligation or in response to explicit requests — have taken on a greater role in the planning process. That’s because the growing cost of health care in old age and high levels of student debt and stagnant wages are hitting young adults.

“We’re only going to see more of it as the baby boomer generation retires without significant savings to carry them all the way through retirement,” says Scott Clemons, chief investment strategist at Brown Brothers Harriman in New York.

The generation bearing the financial burden of both elderly parents and adult children falls neatly into the category of what the Pew Research Center calls “the sandwich generation.” According to the Washington-based think tank, in 2012 about 15 percent of some 2,500 U.S. adults aged 40 to 59 provided financial support to both an aging parent and a child. Experts say that demographic trends continue pushing that number higher, as people live longer and have babies later in life.

Those dueling demands are taking a toll on the financial security of the generation in between. A November study by Chicago-based bank BMO Harris Premier Services found that more than one quarter of sandwich generation members are worried that providing financial support for family members will affect their ability to meet financial goals like saving for retirement and paying down debts such as mortgages. In addition to making direct financial payments, many in the sandwich generation also must grapple with the potential loss of income if they take time out from the workforce to care for family members who need daily assistance.

The emotional weight associated with eldercare can impair clients’ financial decision making. To avoid potentially costly missteps, advisers say that they ask early on — often in the first meeting with clients — whether they expect to have to provide financial assistance to anyone else now or in the future. “If clients don’t bring it up, we might dig a little bit deeper, asking about their parents’ health and whether they have grown children graduating from college,” says Katherine Kraeblen, senior wealth planner at PNC Wealth Management in Raleigh, North Carolina. “You have to try to get your client to open up to see if there are any risks there.”

Once they’ve gotten a clear picture of future obligations, advisers can work with clients to understand the impact that such support might have on their own financial security. Often after clients see how financial commitments to their adult children are affecting their retirement dreams, they’re more likely to scale back such agreements. “We can build in goals around helping adult children, but often those have to be understood as goals rather than expectations,” says James Ciprich, a wealth adviser with RegentAtlantic Capital, a registered investment adviser based in Morristown, New Jersey.

The planning process is different when the adult children have special needs and may be unable to provide for themselves financially. In that case, advisers may help families set up pooled trusts or special-needs trusts to make sure that the family can provide financial support, and potentially support after death of a parent, without jeopardizing the recipient’s eligibility for state or federal benefits.

Most states don’t mandate that adult children financially support their parents, but members of the sandwich generation often want to provide assistance, whether they can afford it or not. Common strategies include covering the cost of long-term-care insurance premiums or co-signing as a guarantor for a nursing home contract, Ciprich says. “This may limit out-of-pocket exposure for adult children while still providing aging parents with quality care,” he adds. “While there may be limits to the legal obligation that adult children have to care for their parents, there often exists a moral obligation.”

The issues get murkier when it comes to helping elderly parents who have limited financial leeway. Although young adults, for instance, can borrow money on their own to cover graduate school or home buying — with the exception of reverse mortgages, which may be a good solution in some circumstances — older senior citizens generally can’t borrow money to cover health care costs or find additional income to recover dwindling retirement savings.

In those cases, advisers should work with clients to explore other options available to cover parents’ needs, including working with an eldercare attorney to evaluate options like a reverse mortgage and any governmental assistance or community services. They can also talk to their clients about collaborating with siblings to determine the best plan to share the responsibility of caring for parents, financially and otherwise.

If clients can’t or won’t heed their adviser’s guidance when it comes to being prepared to provide financial support to family members, advisers need to tweak financial plans to account for such obligations. “There’s a fine line between telling a client what they could do as opposed to what they should do,” Brown Brothers’ Clemons says. “Our job is to lay the trade-offs out there while acknowledging the family dynamics and emotions involved.”