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Sandwich Generation: Should You Go Debt Free?

Eliminating high-interest obligations may not be a smart move if your parents and adult children need financial help

By Jeff Brown

Ah, to be debt-free. It’s a state of bliss, especially as you get closer to retirement. By freeing yourself of all debt before then, you’ll have an easier time covering expenses when your retirement income is likely less than it was while you were working full-time.

A well-worn financial rule of thumb is that it’s always better to earn interest than to pay it.

Well, almost always.

The Exception to a Money Rule of Thumb

Money rules of thumb often come with exceptions. And if you’re a member of the Sandwich Generation — responsible, in part, for the financial well-being of your parents and your adult kids — going debt-free isn’t always a smart strategy.

Eliminating debt might gobble up cash you’ll need to assist your aging parents or struggling children. Conversely, if your parents and kids are on such strong financial footing that they’re providing a safety net for you, it could pay to be debt-free (or start getting there) as soon as possible.

For years, my wife and I — Sandwich Generationers ourselves — added hundreds of dollars to our monthly mortgage payment, allowing us to rid this albatross in 15 years instead of 30 and saving a fortune in interest. Now, with retirement nearing, it’s delightful to live without that big expense. We adopted this strategy because we expect my mother and my wife’s parents will be fine financially and our son’s upcoming college expenses fit our budget.

The whole issue of whether to go debt-free is complicated, so let’s take it in steps.

Good Debt vs. Bad Debt

Financial experts often talk about two kinds of debt: good debt and bad debt.

Good debt typically means mortgages, student loans and perhaps car loans (if the car isn’t an extravagance). You incur good debt for a necessity that you couldn’t buy any other way and which may well produce more value than it costs. A home should grow in value over time (not necessarily every year), a college education should lead to a better-paying job and a car will get you to work.

The type of borrowing that doesn’t provide lasting value is bad debt — things like a mammoth credit-card balance for blowout vacations or a loan for an RV that sits in the driveway 50 weeks a year.

When it comes to bad debt, the rule is simple: Avoid it if you can; if you can’t, pay off the loan or credit card as fast as possible.

Even good debt should be kept to a minimum, though, because its interest payments can sap your wealth. Mortgage interest can double or triple the purchase price of a house, for instance.

Invest in Stocks or Reduce Debt?

Things get trickier, however, when you contemplate the rule about earning interest rather than paying it.

Generally speaking, investing your money in stocks to earn 7 percent a year, the historical return, would be a better use of your cash than paying down a mortgage charging only 4 or 5 percent. (Yes, mortgage interest is tax deductible, but that benefit is often far smaller than people think, a topic for another day.)


The landscape changes, however, as retirement approaches.

At that point, people typically put a priority on financial security and their holdings become more conservative, making the mortgage pay-down a more attractive alternative than stocks. If the bulk of your retirement savings is in the bank or in short-term Treasury securities and earning 1 or 2 percent or less, it may be wise to pay off a mortgage charging 4 or 5 percent in interest.

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“For an investor prepared to assume some risk, a diversified portfolio of stocks could yield 9 to 12 percent or more,” says Jack Guttentag, emeritus professor of finance at the Wharton School, on his website, The Mortgage Professor. "That might make sense, provided you are in your 30s or 40s, are prepared to see your investments fluctuate in value and plan to stick with it over the long haul. If you are in your 60s or beyond, a stock market tumble could crack your nest egg." The same could be said if you're in your 50s.

The Sandwich Generation Debt Issue

Those are the basics. But for people in the Sandwich Generation, there’s more to think about.

Will you need to help your parents with medical bills and your grown children struggling with low-paying jobs or unemployment? If so, it probably makes sense to keep plenty of “dry powder” — money that’s easy to tap in an emergency — and not diminish your savings to, say, pay off your mortgage faster.

But you should do whatever you can to pay off high-interest credit card debt. You’ll save on interest charges and avoid incurring late fees. What’s more, paying off your card’s balance now will make it easy later to tap into your credit limit if someone in your family needs a hand.

Online Calculators That Can Help

If you’d like some assistance weighing the pros and cons of paying down debt, I recommend trying some free online calculators.

Jeff Brown has nearly 20 years experience as a personal finance columnist for publications including The New York Times, The Nightly Business Report on PBS, The Philadelphia Inquirer and For the past 11 years, he has been a frequent contributor to Knowledge@Wharton, the business journal of the University of Pennsylvania's Wharton School. With a son soon to start college and a mother in retirement, Jeff lives the sandwich generation experience daily. He and his son and wife live in Yardley, Penn. Follow Jeff on Twitter: @JefBrownFinance. Read More
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