Your Kids Want Your Money: How to Juggle Retirement, College and Wedding Expectations
Growing up is expensive. When young adults want to get married, that may mean a lavish wedding to kick off the partnership. Buying a house could require a bigger down payment than the money they have in the bank. And nothing seems to financially weigh down young adults more than the cost of college and the student loan debt that often comes with it.
"That's a millstone around many young people's necks, so parents feel an obligation to help," says Travis Sollinger, a certified financial planner and director of financial planning for Fort Pitt Capital Group in Pittsburgh. The only problem is that in doing so, parents may be putting their own financial future in jeopardy.
[Read: Are Your Kids Ruining Your Retirement Plans?]
There are no scholarships for retirement. Financial planners are quick to note young adults can earn scholarships for college, but there is nothing comparable for their parents in retirement. Those who don't save enough for the final years may find themselves without many options. "The danger is that they may end up living in the basement of that adult kid someday," says Shanna Tingom, co-founder of Heritage Financial Strategies in Gilbert, Arizona.
That can have a spin-off effect for generations to come, says Jennifer L. FitzPatrick, author of "Cruising Through Caregiving: Reducing the Stress of Caring for Your Loved One." "Nursing homes and assisted living communities can cost up to $100,000 per year in some geographic areas." Having to absorb even a portion of that cost can wipe out adult children's financial resources, making it impossible for them to save for their own retirement and thus repeating the cycle with their kids.
It all begins with a budget. When children do come calling for a financial loan or gift, parents should look at their budget first before agreeing to fund college, a wedding or another want. "A lot of people miss this step and just start throwing money at these things," says Tiffany Welka, vice president of financial firm VFG Associates in Livonia, Michigan.
Sollinger says another mistake people make is thinking they can pause their retirement savings for a few years while they help pay for college. "There is always a baseline of retirement savings you have to maintain," he says. Once you reduce or stop your retirement savings, it may be difficult to resume later. When parents review their household budget to determine what they can afford, it shouldn't involve any change to their retirement savings level.
[Read: Kids Headed to College? Don't Let Them Delay Your Retirement Plans.]
No requirement to help. Beyond calculating what they can afford, parents should consider their personal preferences. "As a parent myself, I feel my only obligation is to raise my boys to be happy, healthy and well-equipped to function in the real world," says Nicholas Hughes, a wealth advisor with Franklin Wealth Management in Hixson, Tennessee.
Not every parent feels an obligation to pay for expenses associated with the transition to adulthood. What's more, in some situations, providing help can actually be detrimental. "Another danger is that [parents] are actually not helping but hurting them by enabling bad behavior," Tingom says. If a parent is constantly footing the bill, young adults might not be motivated to rein in spending, make a budget or otherwise take control of their finances.
Parents should communicate their plans for providing help, but only once they have decided for themselves what, if any, level of support is appropriate. "I would make sure that you have a thorough handle on what your own immediate and longer-term financial needs are before broaching the topic with your children, so you can stick to your guns and not allow feelings of guilt to sway you into an unwise financial move," Hughes says.
[See: 10 Ways to Get Ready for Retirement After Age 50.]
Saving for both at the same time. When it comes to saving for retirement and college, Hughes asks: Why not do both at the same time? By investing in a Roth IRA, you can put money aside to grow for retirement, but also have access to capital that can be used for college or other expenses. The principal in a Roth account has already been taxed and can be withdrawn without any additional fees. Money in a traditional IRA is also not subject to the early withdrawal penalty if used to directly pay for college costs, but a withdrawal will trigger income tax and could impact financial aid.
However, some families might find this approach does not allow them to save enough for college and retirement. Roth contributions are limited to $5,500 per year for those under age 50, far below what can be deposited in a tax-advantaged 529 college savings plan. Plus, there are income limits on who can contribute to Roth IRAs.
While this might not be the best strategy for everyone, it's one example of how you don't necessarily have to choose between college and retirement savings. "Obviously, everyone wants what's best for their kids," Welka says. The key is to find a way to feel good about helping your children without sacrificing your future financial security.
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