Ensure that the “sandwich generation” is only a one-generation phenomenon, writes Kagisho Mahura
In 1974, sociologist Dr Edward Banfield of Harvard University wrote a book entitled The Unheavenly City. In it he described one of the most profound studies on success and priority-setting ever conducted. Banfield’s goal was to find out how and why some people became financially independent during the course of their working lifetimes.
He finally concluded that the major reason for success in life was a particular attitude of mind. Banfield called this attitude “long time perspective.” Time perspective referred to how far you projected into the future when you decided what you were going to do or not do in the present.
One example given in the book was the choice facing many school leavers – whether to get a job or study further. A short-term perspective would point to getting a job, as this mean there is cash coming in a lot sooner than if you chose to study. However, research has shown that over the duration of a career, the average skilled or qualified person can earn more than double that of the average unskilled worker, despite starting to earn an income several years later.
This attitude of a long-term perspective was often found in successful entrepreneurs and executive managers in large corporations. The ability to take a long-term perspective sometimes leads to decision-making that does not make sense to outside observers, who often have a short-term perspective when judging such decisions.
Long-term perspective in the South African context
There are several challenges facing the black professional today. The first is that many – especially those aged between 30 and 50 – find themselves funding not only a middle-class lifestyle for themselves and their family, but also funding extended families and aging parents. They are typically known as the “sandwich generation.”
Our parents did not enjoy unfettered access to economic opportunities, nor to quality education opportunities and were largely excluded from the formal savings environment pre-1994. A 65-year-old today would have been at their economic prime from the 70s to the 90s. This means this age group largely missed out on the opportunity to harness the power of compounding to help fund their retirement. The challenge of providing for their retirement now falls largely on their children –those aged 30 to 50.
The second challenge is that life expectancy in South Africa for people over the age of 60 has been increasing, especially for those people with medical aid cover and access to private healthcare. This means that retirement provisioning is expected to become even more expensive for this sandwich generation as inflation starts compounding.
Middle-class South Africans also face the reality of funding a “parallel economy” where they pay a premium for services that their taxes should ordinarily cover. So a large part of their budget goes to medical aid, private or semi-private education, armed security response, private transport and alternative energy costs. Many of these expenses tend to rise at a rate higher than inflation, as the middle class continues to expand and demand increases.
A mountain too high
How then do you apply Banfield’s thinking when you are being squeezed from both sides, and discretionary funds are in short supply? I have personally come to the conclusion, as a black professional and also falling squarely into this sandwich generation, that I am unlikely to achieve the kind of financial freedom Banfield referred to in his study. Building wealth while funding two retirement plans (mine and my parents), as well as funding a middle-class lifestyle for my kids, is likely to be a mountain too high to climb.
However, I can organise my affairs to ensure that my children never find themselves in the sandwich generation of their time. My role has changed from building personal wealth to ensuring a dignified retirement for the previous generation, and setting up the next generation to be the real wealth creators of the family. So my planning is different from the professional my age whose parents can fund their own retirement, and whose grandparents started education plans for their kids.
Financial planning for sandwich-generation professionals with a long-term perspective would have more retirement savings rather than discretionary savings. This ensures that you will not be a financial strain on your kids when you retire. Your financial plan is also likely to have disproportionately higher risk cover (death, disability, dread disease) to reduce the likelihood of relying on your children for financial support, but also to leave a large cash legacy in the event of death. The higher associated risk premium leaves less money available for personal wealth creation, but arguably creates significantly more wealth for the next generation.
I, and many of our clients, have not given up on the prospect of achieving financial freedom during our working lifetime. We will continue to nurture our ambitions, work hard and try to create personal wealth in the process. However, this is not a primary objective of our financial planning. The proverbial hand has been dealt and now I need to play my cards right. I can either moan about the unfairness of finding myself part of the sandwich generation, or I can ensure that it is only a one-generation phenomenon. I suspect that Banfield would approve of that thinking.
Mahura is an investment and retirement planning specialist at Gradidge-Mahura Investments.