Are you ‘sandwiched’?

Sandwich generation refers to those who care for their children as well as their parents

We recently had a conversation with an individual who is part of what is called the ‘sandwich generation’. In this article, we discuss the typical financial issues associated with the generation. We then show how to structure a portfolio that addresses such issues.

Sandwich portfolio

Sandwich generation refers to individuals who care for their children as well as their ageing parents. In other words, they are ‘sandwiched’ between caring for their children as well as their parents. This term was coined by a social worker in 1981 and initially referred to women as caregivers. The term now applies to both men and women. The financial issues facing the sandwich generation are primarily two-fold.

One, children’s education costs. College education is expensive, and education inflation is higher than general inflation. Further, there are increasing instances of the sandwich generation having to support their adult children into their late twenties as young professionals are struggling to get well-paid jobs

Two, rising elder-care costs. The elderly are living longer than their previous generations because of advancements in medical technology, but lifestyle changes have led to their poor health.

So what should you do if you are part of this demography? One, you should have a sizable life insurance cover (preferably term insurance) for yourself and your spouse. Why? You and your spouse have to protect the standard of living of your children and your parents. Loss due to the untimely death of even one of the caregivers could have a devastating effect on the family. The cover is a hedge against mortality risk.

Two, you should set up a college-education fund for your children. This fund should hold more bonds and less equity. Why? Accumulating wealth to fund education is a high-priority goal. That means the investment portfolio should not fall short of meeting education costs at the time your child enters college. You should preferably set up a recurring bank deposit and a systematic investment plan (SIP) in an equity index fund. That way, you will have disciplined savings and automatic investments.

Three, you should create a healthcare portfolio for your family, including for your parents. A typical portfolio has a three-tiered structure — a family emergency fund, individual healthcare insurance contracts and an equity portfolio. You should consult your insurance advisor to purchase super top-up plans to increase your family’s medical cover. Note that the family’s health cover should increase with age.

Equity investment is required for two reasons. One, healthcare inflation is higher than general inflation. You need an asset class that can generate higher returns to match this inflation. And two, typical medical requirements can be met with an emergency fund and medical insurance. This allows your equity investment time to appreciate in value, so as to fund, if necessary, critical illness and those not covered by insurance.

Sandwich diet

Your portfolio should contain assets that can be converted into cash at short notice. That means you should preferably avoid real-estate investments, especially if loan repayment would consume more than 30 per cent of your post-tax monthly household income. You should also moderate your exposure to equity, and avoid, if possible, investments in commodities. One exception is financial gold. Why? You can either convert that into cash to meet unscheduled expenses or buy jewellery for your children at a later date.

Remember, your portfolio’s composition and SIPs are important to moderate your financial stress. That, in turn, will enable you to juggle between care-giving and professional life without sacrificing on your personal life.

The writer is founder of Navera Consulting. Send your queries to portfolioideas @thehindu.co.in

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