Financial planning for the sandwich generation

2014-09-21 15:00

A lot of people find themselves giving financial support to their aging parents while supporting their own children. The growth of this generation is an international phenomenon, with developed countries such as the US and the UK experiencing a massive growth in the number of people falling into this group. Kagisho Mahura unpacks the demands

What strategy to adopt?

Much has been written about financial planning for the sandwich generation. Unfortunately, not too much has been useful from a practical perspective and many people tend to spew out standard financial planning tips. The question is: “What strategic approach should people who find themselves part of the sandwich generation take?”

What will have the biggest impact on the financial position of the sandwich generation and its dependants?

From our experience, the answer has to be the protection of current and future incomes. In supporting the previous generation, the current generation and the future generation, there are great demands placed on the incomes of the current generation.

Supporting the elderly

When it comes to supporting elderly parents (and sometimes grandparents), much of the expense goes towards medical and food expenses. It is always advisable to get one’s parents on to a medical aid or hospital plan as soon as possible to reduce the effects of late-joiner penalties?–?this will save money over time. It is not always possible to afford medical aid or medical insurance for aging parents, meaning that this expense has to be funded from income and any household savings.

Supporting children

Financial support for children and adult offspring tends to be around education, clothing, transport and food. Unless an effective education investment was taken out many years ago, this expense tends to be a drag on household income. As with medical and food inflation, education inflation runs ahead of general inflation.

So financial support for previous and future generations tends to be in the form of regular (monthly) commitments, which tend to grow at rates above inflation. This places a strain on the incomes of the income earners, which makes protection of this income critical from a financial planning perspective.

Protecting current and future incomes

We suggest a number of practical planning steps for those who find themselves in the sandwich generation:

1 Draw up a family budget: Budgeting remains the foundation and cornerstone of good money management. It is advisable to involve those affected by the family budget and include them in the process, particularly where one is supporting adult children.

2 Use tax breaks wisely: People over the ages of 65 and 75 qualify for a bigger tax relief than younger taxpayers. A qualified planner should be able to help take advantage of these tax breaks.

3 Ensure all risks to income are mitigated: Insurance plays a critical role in ensuring household income continues in the event of death, disability, disease or retrenchment. A financial plan for a sandwich generation individual should start with a risk analysis.

4 Retirement planning is key: If the sandwich generation is to be a one-generation phenomenon, then retirement planning is key to achieving this. A proper plan will ensure that the current generation does not become dependent on the next generation and that future income is secured.

5 Understand medical funding options: The cost of medical expenses in South Africa can be significant, especially for elderly people who often require some form of chronic medication or multiple hospital visits. There is often confusion around the issue of hospital insurance versus a hospital plan, and which is more suitable especially when it comes to covering an elderly parent or grandparent.

6 Watch retirement and savings reforms closely: One of the proposals from the current reform process is to drop the means test for the state old age pension. This means everyone over the age of 65 will qualify to receive a state pension. This could offer significant relief for some households.

7 Work with a certified financial planner: A financial planner can help with appropriate goal-setting, budgeting and drafting, and implement a thorough financial plan. A financial product salesperson is more focused on selling a product and has little consideration for the long term or for the client’s interest.

Mahura is an investment and retirement planning specialist at Gradidge-Mahura Investments

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