Sandwich generation: Susan Hely Avoid the trap
The demands of ageing parents and adult children are taking a heavy toll on the retirement plans of the 'sandwich generation'
Most people don’t like to talk about it. But it is one of the biggest financial dilemmas facing the generation aged in their 40s to 60s and it is blowing a big hole in their savings and future plans.
How do they help set up their children while supporting their ageing parents, who are living longer and struggling financially? It is a tough financial balancing act. Middle-aged people are being squeezed on both sides, which is why they are called the sandwich generation.
“The sandwich generation is having it tough. Their best-laid plans are being torn apart,” says Damian Hill, CEO of REST, a superannuation fund that commissioned a survey of the intergenerational pressures facing Australians.
Presently some $500 billion is moving up and down the family tree, according to REST’s study, with $300 billion of it from older workers. Most of the money (72%) goes to adult children to help with education costs ($109 billion) as more young people are attending university than ever before and parents want their kids to have the opportunity that it brings. A further $93 billion is given to the kids for everyday expenses while $68 billion is handed out in home deposits.
But if that wasn’t enough, they are also meeting the needs of their parents. REST found that 14% of people are helping their parents pay their bills, particularly their medical bills, as they age. He says a generation ago life expectancy was several years less than it is now.
“Then you didn’t hear about a hip or a knee replacement. Now it is common," says Hill. "One in seven older Australians are providing health support to their parents, paying their general medical bills, particularly if they suffer a serious illness to help pay ongoing costs.”
But providing financial support for kids and parents puts their own financial wellbeing at risk. As they edge towards retirement, the knock-on effect means that some 46% of pre-retirees are carrying debts and 20% will retire with a mortgage, according to REST.
Their generosity now will have a future impact on their future lifestyle. REST found that one in three (35%) retirees are living with what they describe as a "frugal" retirement, says Hill.
“It’s clear that many Australians aren’t living the retirement that they wanted,” he says. But it is important not to sacrifice their retirement. Certainly pre-retirees need to make their own financial needs a top priority. They need to put in place careful budgeting and spending, he says.
The sandwich generation needs to understand the realities of life and do a bit more planning and face up to the financial cost of retirement, says Hill. One strategy is to contribute more to super and consolidate accounts.
But it is no wonder that parents are helping their young adult children. Education costs are rising, home ownership is increasingly out of reach for millennials while wage growth of barely 2% means that incomes aren’t keeping up with the cost of living. Future generations of young people are, for the first time, set to be worse off than their parents, according to a number of reports.
The big expense is education, as the younger generation is the most educated yet, says Hill. “Every generation wants their kids to have more opportunity. They are coming to the party to make sure that they get ahead.”
The future of work is less stable and secure for young adults than it was for their parents. And there has been a drop in fulltime employment.
Not surprisingly, nine in 10 parents (94%) are worried about housing affordability and how it will affect the financial future of their children, according to the report The Future Affordability: Finding Freedom from the Bank of Mum and Dad, conducted by Galaxy for the digital investment adviser Stockspot. It found this trend across all ages, locations and incomes. Mums (63%) are more likely to be "very concerned" than dads (51%).
Most (74%) fear that their children will live at home well into adulthood to become “generation never leave home”. And this means that future boyfriends, girlfriends or partners will move into the family home permanently, which 55% of parents are not happy about.
“Parents are bombarded every day with news of impossible-to-afford houses and the rising cost of living,” says Chris Brycki, Stockspot CEO and founder. “Younger parents, those aged 18 to 34, are the most worried. They are already victim to the housing crisis and low wage growth and now they’re seeing the cost of education go up.
"Some 67% of parents believe that they will have to delay their own plans and a further 67% expect that they will have to provide money to help them buy their first home.”
But while parents are squeezed in both directions, many are not sure if they’ll have the funds to help their adult children. “I believe future generations won’t be able to rely so strongly on the Bank of Mum and Dad,” says Brycki.
He says it is common for parents to open a bank account for their kids, but the survey found that they don’t start an investment account. Most (68%) are most likely to put money in a bank account if they were to start a savings strategy for their children. However, relatively few would put money into a share investment portfolio (13%), because they lack knowledge about investing or believe it to be too risky or unaffordable.
“Saving early and frequently is the single most effective action a parent can take to help children get a financial headstart,” says Brycki.
“Putting money in a bank account is certainly a wise thing to do but parents who avoid investing miss out on the benefits of compound returns. An investment of $2000 in a high-growth portfolio and regular topups of $100 a month at an average after-tax return of 7% per year would result in $60,000 in 20 years. Compared with that, today’s average bank interest rate of less than 2% would achieve only about $32,500.
“Education is vitally important. Too many parents think they ‘don’t get it’ and don’t teach their children about the value of compound returns. Or they think it’s too risky because they had a bad experience stock picking.
“Digital investment services can now spread investments across thousands of companies from Australia and around the world to reduce risk. It’s never too early or too late to start saving and investing. Technology has made saving and investing easier than at any other point in history. The opportunity is there, parents just need to take it”.