Midlife Money Pitfalls to Avoid From a Financial Advisor
More than half of Americans in their 40s are part of the sandwich generation. They are responsible for caring for both their children and aging parents. This juggling act is shared by around one-quarter of those in their 30s and about one-third of individuals in their 50s. Life can feel overwhelming with many demands, but remember this stage is temporary.
Here are tips for handling the challenges of the sandwich generation and improving your finances during this time.
Who belongs to the sandwich generation?
Individuals who are providing care and support to both children and aging parents are part of the sandwich generation. Although it's most common in one's 40s, people of all ages can find themselves in this situation. With so many responsibilities during this phase of life, planning for your own retirement may take a backseat. However, it's crucial to prioritize your own future while assisting everyone else.
Saving for retirement
Gen X, born between 1965 and 1980, is the least confident about retirement. Only 69% feel positive about their retirement savings among the four generations in the workforce. The youngest Gen Xers are reaching their mid-40s this year. Millennials, born between 1981 and 1996, are more optimistic about retirement, with 75% feeling confident about their prospects.
To feel more confident about retirement, create a plan and take steps towards your financial goals. A study on women investors showed that saving even a little more money can greatly reduce financial stress.
Nearly three out of five women (59%) who saved up to 2% of their household income for retirement experienced a fair amount or a lot of stress.
After saving between 10% and 14% of household income, only about three in ten women (32%) reported similar stress levels.
As women increased their retirement savings contributions, the number experiencing high stress levels decreased, indicating that financial stress lessened with each incremental increase in contributions.
Consider these suggestions:
Increasing your savings can potentially reduce the stress you feel about money and significantly improve your retirement prospects.
The type of accounts you save in can also make a big difference. You can save on taxes by using accounts like a 401(k) or IRA. These accounts allow your money to grow without being taxed until you withdraw it. With a Roth account, qualified withdrawals are tax-free. So, in either case, all your money can remain invested, potentially compounding for decades.
Individuals aged 50 and older can contribute a little extra, known as catch-up contributions. The annual catch-up contribution to IRAs is $1,000, and for workplace retirement plans like 401(k)s, the annual catch-up contribution is $7,500 for 2024.
Investing for growth potential with stocks could help drive appreciation and compounding in your accounts. Historically, stocks have outperformed bonds and cash over the long term. Therefore, when investing for a long-term goal like retirement, it may make sense to have more invested in stocks and stock mutual funds. However, investing in stocks also comes with higher volatility, so you need to be comfortable with the risks.
An appropriate mix of investments should be based on your time horizon, financial situation, and tolerance for risk.
Additionally, delaying retirement by a few years can significantly improve retirement savings and ensure a more secure financial future. For more steps to consider, read Viewpoints: Gen X retirement guide.
Managing the Costs of College Education
College costs have increased significantly in recent years, surpassing inflation rates. This has created financial challenges for many families. It has become increasingly difficult for families to afford the high cost of college education. According to the College Board, the average annual tuition and fees at a public 4-year institution were over $11,200 for in-state students and more than $29,100 for out-of-state students during the 2023–2024 academic year.
It's important to determine how much money you can contribute. Decide how much you can afford to spend on college expenses. Addressing these questions early on as a family can alleviate stress in the future.
Here are some tips to consider:
Prioritize your retirement savings. Contribute as much as possible to your work retirement plan. Aim to contribute enough to receive any matching funds from your employer.
Take a holistic view of your finances. Are there areas where you can reduce current spending to save more for future financial goals?
Consider using tax-advantaged accounts. 529 college savings plans are flexible, tax-advantaged accounts specifically designed for education savings. Earnings grow tax-deferred, and since the account belongs to the parent, it has a relatively smaller impact on federal financial aid compared to student-owned assets.
The calculation for determining financial aid has recently changed and is now referred to as the Student Aid Index on the Free Application for Federal Student Aid (FAFSA). The index includes parents' available income, parents' assets, student's income, and student assets.
Student income is assessed at 50%, while student-owned assets are assessed at 20% of their value—instead of the maximum 5.64% for parent-owned assets.
It's a good idea to work with a financial advisor. They can help you find ways to help your children succeed and meet your financial goals. From scholarships and financial aid to tax credits and student loans, there are various ways for students and parents to mitigate the cost of education.
Providing Care for Aging Parents/Relatives
In their 40s, many people face financial pressure from saving for retirement and their children's education. They also become caregivers for their aging parents and relatives. With increasing life expectancy, the likelihood of needing some form of assistance as the years progress—whether it's long-term care, transportation, managing bills, or aid with daily activities—also rises.
To handle the challenges of caring for aging parents, consider the following:
Initiate discussions about their wishes and plans early and regularly. Don't wait to be asked for help; start these conversations while your loved one is in good health. This can prevent surprises and reduce stress if assistance becomes necessary due to an unexpected health event or accident.
Try to avoid making decisions about care during a crisis. Understand your loved one's preferences for long-term care and any plans they may have made in advance. Estimating costs and exploring options can provide peace of mind and help you prepare for any scenario.
Look into benefits provided by your employer. If you need time off work to care for a family member, talk to your employer. Ask them about flexible hours or caregiver benefits. You could also inquire about dependent care accounts.
Bottom Line
Planning ahead can empower you to tackle these typical midlife hurdles and attain financial stability and peace of mind. In middle age, you can save for retirement, plan for college expenses, and care for elderly family members. But, there are also obstacles to overcome during this time.
However, you don't have to face it alone. Working with a financial advisor can help you understand your finances and plan for your future goals.
Sources:
https://www.fidelity.com/learning-center/personal-finance/sandwich-generation
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
529 Plan, or "qualified tuition plan," is an investment account that provides tax benefits when the savings are used for qualified education expenses. Withdrawals from a 529 plan account can be taken at any time, for any reason. But, if the money is not used for qualified education expenses, you will incur a 10% penalty and owe taxes on any investment gains.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.