Are you part of the sandwich generation?
Prevent financial stress when caring responsibilities arise from children and parents.
The Sandwich Generation refers to the growing number of working Australians that need to juggle the caring needs of children and elderly parents.
There are a few parallel issues that are exacerbating this issue. The first is the cost of living and housing in Australia, keeping many younger people in the family home for longer. The second is longer life expectancies for Aussies. Longer lifespans are positive but it means than many people face years of living with chronic illnesses.
Overall, this burden is being carried more by women than men, as they take on more of the caring responsibilities. This can be seen in the 2022 Household, Income and Labour Dynamics in Australia Survey figures (below).
This leads to pressures at work from juggling several responsibilities. It also leads to financial stress. There are suggestions that many younger people are opting not to have children given financial pressures. The OECD predicts that in the next decade, these decisions will become more prominent and deaths will outpace births for the first time in at least fifty years.
Addressing this issue will be a challenge for future governments. However, when it comes to personal finance, it is an enabler to make the best of the circumstances that you have. There are a few steps that can be taken to help ease the financial pressures of caring responsibilities from younger and older dependents.
Members of the sandwich generation have limited ways to improve their circumstances now but have the opportunity to access resources that will ensure they are doing as much as they can to utilisie the available government resources. For those that anticipate facing the caring responsibilities in the future there are preventative measures that you can take.
You are currently caring for children and elderly parents
Income protection insurance
When you have several dependents and you are experiencing financial stress, you want to protect yourself from anything that would exacerbate this. Losing your job and income source under these circumstances would exacerbate the situation.
Protection can be gained by taking out income protection insurance or self-insure through savings.
Ensure that your emergency fund contains enough for three to six months expenses as a priority, and enough to cover any waiting period before you can access your benefits. For example, if you have to wait four weeks from loss of income to access payments, ensure you have that bridge.
Financial Information Service
When it comes to elderly parents, part of caring is starting to be more involved with lifestyle decisions. Part of caring is starting to make decisions about - and sometimes for - your loved ones. Lifestyle decisions include home care and health decisions.
These decisions can be emotionally charged, and it can be helpful to get a second opinion and a good understanding of the resources and options that are available. The government provides a Financial Information Service through Financial Information Service Officers.
You’re anticipating caring responsibilities in the future
Preventative measures
If you are in a situation where you do not have caring responsibilities, or only have caring responsibilities on one side (either children, or elderly parents), there are measures you can take to ease the financial stress that comes with caring.
Create a goal to have a financial buffer
It is easy to foresee if you will have children and caring responsibilities in the future. If you have time until you reach this situation prepare by creating a financial goal to reduce the pressure on your future self.
It is difficult to know when and how much you will need to access when it comes to caring for elderly parents. However, it is easier to determine when costs will increase for children when it comes to education and living costs.
You can start by preparing for the financial knowns. You can find an outline to planning and investing for a financial goal here.
When it comes to the financial unknowns, a yardstick is better than an unknown. Further down, I speak about the average costs that come with chronic illnesses and care. This gives a rough outline if you willbear the financial costs for elderly parents or relatives.
Don’t let your financial future suffer
Vanguard’s How Australia Retires report provides sobering data on the impact of career breaks.
This practical example doesn’t just stop at career breaks for child-rearing responsibilities. It can account for other care scenarios, such as for elderly parents. Situations like this do not have as much structural support. This means that it is particularly important to create a plan that accounts for the impact of missed retirement savings and the potential for unpaid leave.
Around 40% of working age Australians expect to take an extended break from work, and 1 in 2 under 35 expect to take parental leave.
Career breaks can come in all shapes and sizes. A break can be used to care for elderly family members, as parental leave, for extended travel or for study. Regardless of the reason, it means that your superannuation contributions will stop. The exception to this is parental leave, where there’s government mandated contributions from your employer.
Government mandated parental leave contributions may not be adequate. Many women take a longer period off work to care for new children (an average of 32 weeks leave) than the mandated parental leave benefits (18 weeks of leave).
The issue with career breaks, especially earlier in life, is that your contributions have less time to compound. The impact of longer career breaks is significant for superannuation balances, and therefore your retirement balances. Ensure that you are also taking care of your future self and not delaying financial stress into your retirement.
Extra contributions prior, during or after the career break
For career breaks that are planned or unplanned, extra contributions in the lead up, or upon your return to work, can ensure that you do not end up with lower retirement outcomes.
This can be done in a few ways. Planned career breaks are relatively straightforward – it is important that you financially plan for these breaks. A plan will enable you to replace the contributions that you will miss during your break.
Unplanned breaks are a little more difficult. These breaks mean that you will often be dipping into savings or emergency funds to support yourself and will not have the resources to also contribute to your retirement.
A good tool to use is the MoneySmart Superannuation Optimiser. Regardless of career breaks, it gives you a general idea of how to optimise your contributions into super while taking your take home pay into account.
Spouse co-contributions
If you have a spouse, there are ways that they can contribute to your super. The first is contribution splitting. Contribution splitting allows you to split the super contributions that have been made. This can include up to 85% of the contributions in that financial year. If you are taking time off to care for children or elderly parents, this ensures that you are still preparing for retirement.
Changing asset allocation
If you have a while left until retirement, you’re able to take on a more aggressive asset allocation to account for missed contributions. We talk about this in detail in our Portfolio Review episode.
You’re on the receiving end of future care
Reducing the burden for children
If you are looking to reduce the caring burden on children as you age, there are ways to lessen the financial burden. This will help children to focus on making the decisions with you to give you the best quality of life possible in your later years, without having to worry about the financial aspect.
Chronic illnesses
Research from the National Centre for Epidemiology and Population health shows that ‘individuals with multiple chronic illnesses can spend up to six times more than those without a chronic illness. Those on lower incomes are fifteen times more likely than those on higher incomes to incur catastrophic health care costs (>10% of household income).’
Another study from the University of Technology Sydney surveyed 800 women with osteoarthritis. The study showed that on average, these women aged between 53 and 94 had more than seven specialist care appointments in one year – for a single condition. After Medicare rebates, $673 was required to cover the appointments, therapies and medication.
There’s over one million Australians that have multiple chronic conditions that can be a heavier financial burden. The Grattan Institute found that they pay more than $1,000 each year on out-of-pocket expenses. The same study found that over the past decade, out of pocket costs have increased by 50%.
Some chronic illnesses are more expensive than others. For example, Alzheimer’s would require full time care for developed cases.
How to account for health costs in retirement savings
Start with understanding your expenses in retirement
The general rule is that expenses increase at the beginning of retirement as many retirees decide to travel and pick up hobbies. These costs tend to decrease after time, and then surge due to specialist and end of life care. However, there may be significant reductions in spending, such as if you are making a sea change, or if you’ve paid off your mortgage.
As retirement progresses, this is where you may need to consider more costs going towards chronic conditions. You may also need professional care. Like retirement in general, the duration and extent of care is difficult to predict. However, the whole point of planning is to address potential contingencies.
A baseline for retirement planning is your current salary and continuing your current lifestyle in retirement. Then adjustments can be made. Your expenses may differ from your pre-retirement salary for several reasons. The first is that there will be less incidentals that are associated with work. For example, transport to and from work and lunches that you may buy most days. However, you will have free time in retirement that could mean increased leisure costs and travel costs. This will depend upon how you envision retirement and what is achievable with your retirement savings.
ASFA’s Retirement Standard Detailed Budget Breakdown outlines that the average costs per year to cover medical and health related costs in retirement is $5,880 for a single person and $11,018 for a couple.
This is a general guideline. It is difficult to know how much to put aside as the future is unknowable. However, having a goal instead of simply trying to maximise your wealth will allow you to manage the risk in your portfolio and increase the likelihood that you will achieve your retirement goals.
Now that you have a general guideline of expenses, you can use this to understand how much you need in retirement. This article I have written goes through the steps of finding out how much you need to retire and explores resources to create a plan towards this goal.
Have a plan
As well as a financial plan, have a care plan laid out. Making your intentions clear makes it easier for your children to make decisions on your behalf when the time comes. Verbalising this as well as having a physical copy of your plan will help your children in the future with these difficult decisions.
Conclusion
Whether you are currently in the sandwich generation, expecting caring responsibilities or expecting to be on the receiving end, planning for these circumstances can reduce the financial stress that comes with an emotional and stressful time in your life.
Taking a step back and preparing will give you more time to compound your savings and help with the financial stress. It will also allow you to spend more time with your children and parents in those years.
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