As families across New Jersey celebrate their children’s graduation from college, they’re faced with a new money challenge: adult kids without jobs or a place to live.
At the same time, many are trying to help elderly relatives who need care. Rather than focusing on retirement, the “sandwich generation” is trying to fund multiple goals with limited resources.
“When planning for retirement and preparing cash flow models, most people lay out the expenses they expect to incur during their retirement years,” says Lisa Osofsky, a certified financial planner with WeiserMazars in Edison.
“When you factor in monthly costs to pay for an adult child’s rent or assisted living for parents, their ability to retire when they want to — or with the amount of discretionary income they had hoped for — is substantially diminished.”
If you find yourself among the sandwiched, here are some tips.
HELPING YOUR KIDS
The economy may be on the mend, but there are still thousands of college grads with few job prospects. That means they’re heading back home to Mom and Dad. If you’ve decided to let Junior back into his bedroom, you need to set some ground rules. Some parents may be willing to financially support a kid as long as they fulfill job search expectations. Others may expect rent and help with playing for groceries. The right way to go depends on your family’s situation.
You may want to include a written budget or a set pattern of payments to help clarify the expectations for each family member, even if it does not rise to the level of a formal written agreement, Osofsky says.
“This may be a good tool, for example, to use with your 27-year-old son who has agreed to pay some rent every month or cover certain household expenses, but it may not have any real legal grounds if he doesn’t live up to his end of the deal,” Osofsky says.
HELPING YOUR PARENTS
Providing support for an aging parent is more complicated, even if your parent has some financial resources. It’s all about planning. “Failure to plan ahead for aging parents can result in unintended consequences, which can, in turn, throw your own retirement plan offtrack,” says Nicholas Pontilena, a certified financial planner with Primary Financial in Fairfield.
Make sure your parents are of sound mind and have all of their legal documents, such as wills, health care proxies and living wills. Whether or not they already have these documents, Pontilena recommends you have them meet with an elder law attorney who can review all assets and make sure the right plan is in place. Having a plan and communicating with your parents while they’re healthy is a must. This will help avoid conflict later, and you will know your parents’ wishes should they be unable to tell you someday.
It’s also important to plan so you don’t rush into something and move assets haphazardly or prematurely without knowing the consequences. “Oftentimes, the adult children will shift older parents’ assets into their names to qualify for some type of government assistance and this is not always the correct course of action,” Pontilena says.
You can’t just live day-to-day funding all of these expenses. To make your money work, you need to understand their interrelationship, so you can get ahead of the curve. Osofsky says you should first identify your fixed expenses, such as rent or mortgage payments, insurance, car payments, taxes and utilities. Then, outline your variable expenses, such as vacations, gym memberships, credit card charges, entertainment and dining out. Next, compare the costs to your income to see if there is a shortfall.
“Then work hard to reduce some of the expenses that are discretionary, even if temporarily, until your family members don’t need as much financial support from you,” she says.
You may find some tax savings if you’re eligible to claim your relative as a dependent. “There are two types of dependents — a qualifying child or a qualifying relative,” Osofsky says. Certain age, income and other requirements (which the IRS calls “tests”) apply. A qualifying child must live with you more than half of the year, while a qualifying relative does not have to live with you at all, but must meet other criteria. In both cases, you must generally provide more than half of their support for the year, she says.
Even if the person you’re helping doesn’t qualify as a dependent, you may be able to deduct out-of-pocket medical expenses you pay for the person, Osofsky says. She also warns that you should also be aware of the gift tax rules, if you give more than $14,000 to a person in a year. If you plan to give more, get professional advice first.
“Many more people today are helping to support other family members, in addition to trying to fund their own retirement,” Osofsky says, “so getting a handle on what those needs are, how best to pay for them, and who has the ability to contribute toward paying them. This will help ease the pressure of cracking that nest egg sooner than you thought.”