Money Management - November 2003

THE SANDWICH GENERATION

Boomers Stuck in the Middle

by Margaret Maul

The dramatic increase in longevity from 49 years in 1900 to 85 years in 2000 has created financial challenges unique to our times as members of the baby boomer generation find themselves part of the "sandwich generation" – caring for elderly parents while financing their children’s college tuition.

To confront these financial hurdles, members of the sandwich generation must look aggressively at increasing their retirement savings during a period of time when they are realizing they also must adjust certain personal and professional goals. The aim is to integrate investment and savings goals, while maximizing any tax benefits along the way.

The tax-free 529 plans are now widely viewed as one of the best ways to save for college tuition. Part of the Tax Act of 2001, Section 529 enables taxpayers, at any income level, to participate in state-sponsored tuition plans without residency requirements. A special provision in the law allows contributions up to $55,000 in one year, and the gift is treated as five gifts of $11,000 each over the next five years. If married, a couple can make a combined one-time gift of $110,000. Additionally, contributions may be made to the account by anyone wishing to make a gift.

There is no up-front deduction for contributions, the investment grows tax-free, and qualified withdrawals are exempt from federal taxes. In addition, Section 529 assets are transferable between family members should the intended beneficiary choose not to attend college. On most plans, there is no imposed time limit and all monies are held in the contributor's name, not in the name of the future student, thus making application for financial aid easier. In addition, some states offer state income tax benefits.

The Coverdell Education Savings Account is also a very attractive college savings vehicle for many people. This avenue also enables families to save for elementary and secondary school expenses. The maximum contribution of $2000 per year is held in the beneficiary's name and must be redrawn by age 30.

The ultimate truth is, the closer children get to college age, the closer the sandwich generation’s parents get to the possibility of declining health and the need for extra care. Projections are that spending on nursing-home care will increase from a current $94.1 billion to $125 billion in 2005 and $330 billion by 2030.

The average cost of skilled nursing care is $65,000 to $90,000 per year. Assisted living can cost more than $45,000 annually. And, contrary to popular belief, Medicare does not cover these expenses, except for a few days in a skilled nursing facility after a hospital stay. It is true that state Medicaid programs cover nursing care, but only for the indigent.

The most important action a member of the sandwich generation can do immediately is to become intimately familiar with parents’ financial condition and educated on the availability of such vehicles as tax-qualified and non-tax-qualified long-term care insurance plans. Tax-qualified plans provide purchasers with certain tax advantages, including the assurance that benefits paid reimbursing them for qualified long-term care service costs will be excluded from their taxable income. Another advantage is that premiums paid for tax-qualified long-term care plans can be deducted as medical expenses by taxpayers who itemize.

When all is said and done, members of the sandwich generation should maintain the course, follow an individualized investment strategy preparing for their own retirement, while taking advantage of the myriad of options available to prepare for college tuition and parent-care.

Margaret Maul
Margaret Maul is the president of Maul Capital Management, a Las Vegas-based investment advisory firm.