Planning recipe for sandwich generation

As the New Year euphoria dies down, the veil lifts on a reality that’s not so bright and breezy. The year 2011 brings with it the burden of baby boomers, the oldest of whom, turning 65 this year, will trigger a wave of retirement.

While many of them have some kind of financial plan, savings and investments, others will depend on their children for financial support and caregiving. These children have children of their own and may find that the need to care for ageing parents could lay on another layer of stress, both financial and emotional.

Standing on the line between dreams and duty, this faction is known as the sandwich generation. Caught in this financial and emotional crunch of caring for children and parents at once is Tom Collimore, head of industry relations at CFA Institute. The topic is close to his heart and he readily offers some reality bites for the sandwich generation.

“There are a lot of claims that require a lot of money and they are conflicting claims,” he says. “It requires a balancing act between trying to remain liquid for the relatively short-term needs such as medical care of one generation, and portfolio performance and growth required to finance long-term needs such as education for another generation.”

The challenge of balancing liquidity with growth is a common one. But it gets worse. Of the many pitfalls of such planning, Collimore shines a light on three crucial issues.

“One is over-optimism and that’s expecting more of your investments than your investments can possibly deliver,” he says. “That is obviously exemplified by the current interest rates market in the U.S. where we’re used to looking at 1% returns for a savings account.”

With any kind of inflation, that return becomes negative very quickly. Another problem area is under-planning. “There are lots of medical issues if you have parents or in-laws who are in their 70s or 80s; even the healthiest seniors have some kind of medical issues.”

There are some practical implications such as inability to relocate that come from under-planning, he adds before rounding it off with the final issue: depression.

“It’s easy to get depressed by all this and do nothing,” he says. But procrastination benefits no one. “People need to stay focused on the task at hand and not just put things off until the problem becomes worse than it was in the beginning.”

Doing your own financial planning is, at best, a time-consuming and complicated process. Collimore admits it’s hard to meet the demands of financial planning for three generations. “There are people who specialize in this kind of thing,” he says. “If you are able to afford a financial planner, one of the first questions you’d ask him or her is if they have clients in the same position.”

Advisors should be ready to answer when clients ask this question. It helps clients evaluate their advisor’s principles, experience and fundamental values.

Collimore concedes planning for multiple objectives, matching assets with liabilities can be tricky. “In this case the range of liabilities is probably broader than average because you have the extremes here of kids who have a long-time horizon and seniors who have relatively short-time horizon.”

Tight financial resources don’t make things any easier. Collimore suggests two approaches to meet financial obligations of these plans. “One is the portfolio approach, where you have a balance on the asset side to meet a range of expected liabilities,” he says.

“The other is a liability directed investment approach, which is where you actually set up buckets of investments to reach each goal independently. That’s generally seen as safer but less profitable because you typically have a narrow focus of investments you might set aside whereas with the portfolio approach, you can spread across a range of assets and optimize based on a range of outcomes.”

Either way, investors have to be realistic about their expectations for the stock market, the investment portfolio overall and their career asset.

So is there a one-plan-fits-all solution out there? Collimore offers a rather tongue-in-cheek answer that sincerely summarizes the situation. “The only one-size-fits-all programme is to save money.

“The boring thing is you go out to dinner less and watch more DVDs at home.”

On a more upbeat note, he says people should be optimistic about their ability to get through these types of issues. It can be overwhelming as a whole, but when broken down to little pieces, one realizes it’s not the end of the world.

“You break up the chore of financial planning, of actually physically taking care of your parents and kids, and see what you can outsource and somehow it manages to work.”