Consider this counterintuitive personal investment trend: Those Americans in the middle of their peak professional earnings years are also going through feelings of financial insecurity greater than they will ever again experience.
There's a straightforward demographic reason for this, and it already has a name: the sandwich generation—Americans stuck between dependent kids and aging parents who need caregivers. It's no surprise, then, that sandwich generation can be known by another name: the sandwich investors, feeling less sure than ever before about their financial footing.
"Having parents that are 80 and 72 and dealing with heath issues, and kids still at home, I can really relate to the financial strains of being in the middle of a sandwich generation. Forty-five- to 55-year-olds are dealing with a lot of rapid-fire financial responsibilities," said Adam Sohn. Sohn may not be a retirement expert, but as an AARP vice president, he knows a thing or two about the impact of aging on all facets of life.
A recent BlackRock survey detailed the investment-specific repercussions of this "stuck in the middle" phenomenon. What was fascinating for BlackRock officials in the postmortem survey analysis is that both younger and older investors are more confident than the sandwich investors.
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Fifth-three percent of these Americans are more likely than any others, older or younger, to feel negatively about their financial future. They are also the demographic group to most likely feel "not at all in control" of their financial future and "not at all confident" about making the right savings and investment decisions, the survey found.
"They are caught in a crunch," said BlackRock's Rob Kron, head of investment and retirement education. "There is lots of talk about the 55-to-65 segment, the immediate pre-retirement demographic and their preparedness, but it's the segment just behind those folks that is most concerned and most anxious and feeling unprepared," Kron said.
There is lots of talk about the 55-to-65 segment, the immediate pre-retirement demographic and their preparedness, but it's the segment just behind those folks that is most concerned and most anxious and feeling unprepared.Robert KapitoBlackRock president
Sandwich ingredients
BlackRock refers to this group as "early pre-retirees"—a mouthful of money marketing mumbo-jumbo, maybe—but the profile is accurate of the individual who is saving but also hemmed in by college costs, retirement and aging parents. And the importance of identifying this group can be translated in plain investing sense: In the 10 to 20 years before retirement, average individual financial behavior and attitudes hit a trough.
The BlackRock survey found that about half (53 percent) of Americans are confident that they will achieve the retirement income they need, but just 45 percent of those ages 45 to 54 are similarly confident—the lowest level of all the age groups represented in the poll.
BlackRock found that early pre-retirees allocate the most to bills and debt of almost any age group—an average of 53 percent of monthly take-home pay on such costs (compared with an average of 49 percent among Americans). Early pre-retirees also reported the least amount of monthly take-home pay left over to spend—22 percent vs. the U.S. average of 24 percent.
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Cashing in
There is hope, and it can be found in the higher confidence level coming from those surveyed who are older than the sandwich investors, the so-called "immediate pre-retirees." Immediate pre-retirees—the segment BlackRock thought might be the most concerned—are more confident than early pre-retirees about achieving wealth preservation (74 percent vs. 62 percent) and funding a comfortable retirement (63 percent vs. 54 percent).
Many early pre-retirees are likely to pull through the financial anxiety and ultimately express greater confidence. Although only 41 percent of 45- to 54-year-olds feel positively about their financial future, 47 percent of 55- to 64-year-olds and 54 percent of 65- to 74-year-olds have a positive outlook, the BlackRock survey found.
There are some critical decisions to make, though—and mistakes to avoid—for sandwich investors who want to reach that level of greater financial confidence.
BlackRock found that 48 percent of this age segment invests in cash. "In peak earnings years they need that money to work for them," Kron said. "We are trying to emphasize it's time in the market, not timing the market," he said. "Sitting in cash is not helping," he said, and it's a non-strategy that, if not corrected, ultimately leads to reduced purchasing power because of inflation.
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"With this generation they are incredibly busy people on a daily basis dealing with work, kids and lots of competing priorities, so part of sitting in cash is uncertainty as to what to do and lack of time to figure it out," said Lena Haas, senior vice president of retirement, investing and saving at E*TRADE Financial. "If you are sitting in cash, you are missing out on the recovery in the market, not keeping up with inflation and not making your money work smartest for you," Haas said.
The E*Trade executive added that many of its customers are sandwich generation members, and what E*Trade tells them first and foremost is you have to prioritize, and having a plan really helps. "Data has shown us that just having a plan and saying, 'This is a bucket of money devoted to day-to-day expenses,'—whether it's 50 percent of paycheck or whatever—and 'This is bucket is for highest-interest debt,' helps," Haas said. "Pay yourself first."
A decade here, a decade there
Haas said the first step is to make sure potential cash-flow needs that may be encountered in the next two years (or 6 to 9 months for a single individual) are in a highly liquid account, but beyond that, individuals need to start taking risk in the markets. "You have to keep in mind if you're going on the generally accepted age of 65, you still have a long time to go. If you're 55, even, ten years is a long time to experience returns that will compound and grow your asset base," she said.
E*Trade data forecasts that for an individual at age 45 who plans to retire at 65, if they contribute the minimum to an IRA and achieve a 4 percent return annually, by retirement age that will be $190,000 (with an assumption of $5,500 a year contributed).
Nevin Adams, director of education at the Employee Benefits Research Institute, said the financial crash didn't do this group any favors, either, leaving them with investments in their retirement plan that might well have been more deeply impacted than other groups, as well as home values that still have not recovered entirely.
"I think they have more current 'calls' on their finances than retirement and thus might well have less money to allocate to longer-term issues. The kids' college tuition bill is on the dresser, and Mom needs to get some assisted-care living now, after all, while retirement is still more than a decade off," Adams said.
The investors of the sandwich generation have admitted they have a problem. Now they just need to do something about it.
"There is still time," Adams said.
—By Eric Rosenbaum, CNBC.com
