Are You the Meat in the Sandwich Generation? (Part 3)

For baby boomers in the sandwich generation, financing the future for three generations is no small juggling act. That’s why to reduce the anxiety – and to actually thrive – throughout this challenging time requires careful long-range planning for the potential costs of each of the three generations in your sandwich.

How Much Will You Need to Retire?
The average retirement age in the United States is now about 63, according to AARP. Thanks to recent medical advances, many Americans are living 20 to 30 years beyond that age. That statistic is a blessing, but it also requires an adequate retirement plan so your financial needs are met.

The amount of money that you must contribute regularly to a pension fund depends on your retirement goals and expected lifestyle. As a rule of thumb, advisors today are recommending a retirement income of 80 to 85% of your current household income to maintain a similar lifestyle. This figure takes into account that many of your current expenses of going to work would disappear and that you would likely move into a smaller home with lower property taxes and maintenance costs.

On the other hand, if you plan to do things like travel more, move to a more upscale community or invest in a vacation home you might spend more than you do now.

Another consideration to take into account is the effect death or a disabling injury or illness can have on your meeting your goals. A premature death can impact so many financial goals, including securing enough income for the retirement years of your spouse. Adequate life insurance needs to be in place to make sure that income is available to allow your spouse to continue to maintain his or her independence and not have to rely on children or other family members for support.

In addition, if your ability to work and earn income is affected, how will you accumulate the dollars you need for retirement and to meet your current monthly living expenses, such as paying your monthly mortgage or auto payments? Disability income insurance needs to be in place during your working years to make sure your income is protected.

Finally, what if a disabling injury or illness occurs that requires long-term care? This could occur during working years, presumably when disability income insurance is owned, or during retirement years. If care is needed during working years, disability income insurance will help protect your income, but you will have to dip into the money you had accumulated for retirement to help pay the costs of that care. Depending on the length of time the care is needed and with care costs continuing to increase, this could have a potentially dramatic effect on your funds available for retirement. In essence, depleting these funds to pay the care costs could create an uncertain financial future for both you and your spouse.

If long-term care is needed during retirement years, then the assets that had been accumulated and are being used for retirement will have to be used instead to pay for the costs of care. Again, the depletion of these assets will have a dramatic effect on your future quality of life in retirement.

Creating a Retirement Budget
So, what steps should you take to determine what you’ll need during retirement? The most reliable retirement strategy is to first estimate the income you will need during retirement, using itemized projections of fixed, variable and discretionary expenses. Then add up your expected sources of retirement income, which could include retirement accounts, pensions and Social Security, interest and dividends on savings and investments and veterans’ benefits.

A retirement budget worksheet can help you get started. Your accountant and other financial advisors can help you with the projections and calculations, including adjustments for inflation.

If your estimated expenses are greater than your projected income, the difference between the two is called the “retirement gap.” To fill that gap, you’ll need to step up contributions to your existing retirement accounts or establish additional accounts and start funding them.

The best way to accumulate retirement funds is by contributing to a tax-advantaged retirement savings plan, the most popular of which are traditional IRA and Roth IRAs or employer-sponsored 401k. These plans are powerful savings vehicles, thanks to their exceptional tax advantages.

If your target starts to appear unreachable, you may have to scale back your expectations, postpone your retirement or cut back your current living expenses.

Once you have a retirement budget in place, review it every few years and more often as you approach retirement. Be sure to adjust your estimates and targets for major shifts in the economy, new tax laws, revised personal goals, changes in your health, and the birth or death of family members.

As part of long-range retirement plan, you also should consider the benefits of long-term care, disability income and life insurance for yourself and your spouse.