Those that know me well can vouch for the fact that I am a frugal person. I feel that there is much that is virtuous about living a frugal life. Learning about delayed gratification and the important limits to set upon our role in a consumption based economy is a great path to happiness and peace. The famous economist and philosopher John Stuart Mill once said, “I have learned to seek my happiness by limiting my desires, rather than attempting to satisfy them.” This simple phrase rings true to me. This is especially evident as you stand witness to the constant bombardment of consumerism in our media and markets. Take stock of what you have and the blessings of life and you might not fall prey to the treadmill of consumption that will always be tempting you.
Top 10 rules to a frugal life:
- Budget – know where your money goes.
- Be guarded against lifestyle inflation; try to keep income growing faster than expense growth.
- Don’t be wasteful. Consider gently used items when buying cars, and other depreciating assets.
- Find discounts whenever possible.
- Trips and vacations are about experiences, not necessarily lavish accommodations.
- Frugal people rarely eat out, preferring to prepare their own food. I find it better and healthier, not to mention less costly.
- While there are many worthwhile private schools, there is a great value to be found in many of our public schools as well. Consider whether public schools, for both young children and college, may be right for your family.
- Frugal people care less about fads and trends; keeping up does not matter to them.
- Know the value of a dollar, if there is a lower interest rate find it.
- Don’t be cheap, stay generous. It is ok to part with money to help others.
Richard Manske, CFP® Managing Partner
Recently I was on vacation with a friend, and while enjoying the sunshine she received a CNN alert…
Breaking News: Dow Jones Industrial Average soars to an all time high.
She then asked me what the Dow Jones was exactly … “Should I know what this means?” My response was, “it’s a stock market index, of course.” Seeing the perplexed look on her face, I realized that she had no idea what I was talking about. After having this conversation, I wanted to share with you what I shared with my friend.
- What is a market index? – A stock market index is simply a measurement of the value of the market or a section of the market. Let’s break it down into a simple example. Assume ABC index is made up of 6 companies. At the end of trading on Monday the index is at 5,000 points. On Tuesday, three of the companies go up in value, two of the companies go down and the sixth company stays the same. The total value of the stocks change by 3% on Tuesday, so now the index is at 5,150 points. This tells you that this section of the market went up in value from Monday to Tuesday.
- Why are market indexes important? Choosing appropriate investments is only the beginning. One of the biggest challenges of an investor is to determine how well your portfolio is performing. Are you lagging behind the market or beating it? You can only know the answer to these questions if you have something to compare your investments to. Indexes allow you to measure the performances of your investments against an appropriate benchmark.
- How do you choose the right benchmark? In general, when you are tracking the performance of an investment, you look at a benchmark that is most similar to your investment. For example: If your portfolio is all U.S. large cap stocks you would likely use the S&P 500 as your benchmark. If your portfolio is all fixed income then you would most likely benchmark against the Barclays Aggregate Bond index. If your portfolio is a combination of both large-cap stock and fixed income you would want to use a blended benchmark of the two indexes.
- All of this is for naught if you don’t know what indexes track which stocks. Here are some of the most common market indexes and the companies they are comprised of.
- Dow Jones Industrial Average (DJIA) – This is one of the most popular measures of the market. A.K.A. “The Dow” or “Dow 30” is a price-weighted measure of 30 US blue-chip companies. The index covers all industries with the exception of transportation and utilities, which are covered by other Dow Jones indexes.
- S&P 500 Index – This index is based on 500 U.S. large cap companies that have common stock listed on the NYSE or NASDAQ. These companies are representative of the industries in the U.S. economy.
- Russell 2000 – This index tracks 2,000 small-company stocks. It serves as benchmark for the small-cap component of the overall market.
- Dow Jones Wilshire 5000 – This index covers over 5,000 US companies listed on major stock exchanges. This includes US companies of all sizes across all industries.
- Barclays Capital Aggregate Bond Index – This is a broad-based benchmark that measures the investment grade, US dollar-denominated fixed-rate taxable bond market.
- MSCI EAFE Index – This index is designed to measure the equity market performance of developed markets outside of the U.S. and Canada. EAFE is an acronym that stands for Europe, Australasia and Far East. (Check out Sarah DerGarabedian’s blog post from last week to read why it’s important to have an international allocation – http://wp.me/plOKq-oE)
- It’s important to remember when comparing your investment returns to compare your results to the long-term market, not just the past year. Typically analysts look at 3, 5 and 10 year returns. Short-term results can often be misleading due to short-term volatility. A quick Google search should provide you with the long-term returns of any of the major indexes.
After explaining all of this information to my friend, I think she had a better grasp on market indexes and hopefully this information is helpful to you too. One realization that came from our conversation is that sometimes financial advisors (nerds) forget that things that seem so common to us aren’t as familiar to those not in the industry. We never want a client to leave a meeting or conversation feeling confused or uncertain. If you have questions, please ask! We may just write a blog post about it.
Ashley Woodring, CFP®
My father was ready for retirement. We had several discussions about picking the right time. Choosing when to retire is always a big decision. Conventional wisdom suggests the longer you wait, the better. You have more time to save and eliminate debt. Your Social Security benefit could be higher. On the other hand, how many people do you know who died before they could retire? There is something to be said for “getting out of the game” and enjoying your life.
We discussed a myriad of items. In the interest of brevity, let’s talk about two of them: finding the right insurance coverage and managing your time.
Health care is a big ticket item. No matter how well we take care of ourselves, our bodies will need more attention as we get older. Finding the right coverage is vital. Individuals over age 65 have Medicare Part A. Most people obtain supplemental insurance coverage since Part A does not pay for everything. Some plans are very expensive. Some plans provide minimal coverage at a reduced cost. Penalties can be incurred if one does not sign up for Medicare when required. And, if someone retires before age 65, coverage must be found to bridge the gap between the retirement date and Medicare eligibility.
I was overwhelmed. I arranged for my parents to meet with an insurance agent who specializes in Medicare plans.
Thanks to the draft, my dad spent a few years in the Army. His service gave him a permanent distaste for peeling potatoes. More importantly, it provided him with access to health care benefits. His previous employer’s insurance plan was awful, so he used the VA coverage as a supplement for years. He said the prescription drug discounts are good.
The agent found appropriate policies for both of my parents. My father’s supplemental policy needs were reduced by the VA coverage, whereas my mother needed increased coverage. It helped to have someone with Medicare knowledge guide them through the process. I highly recommend seeking help instead of trying to research it on your own.
She could not help us with the other problem: occupying my dad’s time. He is not a “lounge around the house” kind of guy. He must stay busy. He made a plan for the first year of retirement. He wanted to remodel the kitchen – build cabinets, replace the countertop himself, install new flooring, et cetera. He planned to tackle some home improvement projects at my house (yeah!). He wanted to get a dog which would give him a buddy and an excuse to get outdoors. Then, in about a year, he hoped to get a part-time job at a nearby home improvement store. He would be perfect for the job, and the store employs a lot of older workers.
He knew he could not be happy unless he was busy doing something. When considering retirement, it is very important to think about how one will occupy time previously spent working. We all have fantasies about what we would do. When faced with the reality of filling those hours, though, it can be a daunting task.
In the end, my father did retire. I saw an immediate “lightness.” He smiles and laughs easily. Plagued with ulcers and wicked reflux most of his life, his gastro issues have greatly improved. Retirement definitely agrees with him.
Someday, you may have the same conversations with your parents. My advice is to get help from people who know more than you – financial advisors, insurance experts, estate planning attorneys – whenever you encounter unfamiliar issues.
The same advice applies if you are considering retirement. There is more to the issue than whether or not you will have enough money. My parents and I spent almost a year talking about it. Just as you took time to find the right career or the right house, care should be taken with retirement planning too.
Of course, Parsec is here to guide you. Retirement matters are too complex to tackle alone.
Cristy Freeman, AAMS®
Senior Operations Associate
This is the fifth post in a series of six blog entries focused on topics that might be of interest to the Millennial generation.
Today I’m going to touch on the exciting topic of interest rates. Okay, let’s be honest, most of us consider the subject boring and highly technical at best, and pure financial torture at worst. But hear me out. I’d like to explain why interest rates are in fact pretty fascinating, surprisingly straightforward, and worth learning about. The truth is that interest rates can have a massive impact on your current and future financial situation.
So what are interest rates? And how do they affect your financial well-being? If you think about it, everything in our modern society has a cost. You pay for a good meal at a nice restaurant, there’s a charge for staying at a hotel, and an education certainly isn’t free. The same holds true for money. It has a cost and that cost is interest rates. In order to get your hands on some money, say for a car loan, a mortgage, even groceries, you pay for that money in the form of an interest rate. When you have a good credit history, i.e. you consistently pay back other people’s money in a timely manner, you’re considered a good credit risk and it becomes cheaper for you to borrow money in the future. In other words, the interest rate you’ll get charged on loans will be lower than the average person. This is a good thing for your financial well-being. On the flip side, if you are even occasionally late on a credit card, car loan, or any other debt payment, you become a less desirable credit risk and the rate at which you’re charged to borrow money in the future goes up. In other words, the interest rate on the next loan you take out will be higher and you’ll pay out more money over the course of the loan, all else being equal.
You may have heard about the compounding power of interest and how it can help you significantly grow your wealth. This is a very true financial tenant when it comes to investing your money. However, this same principle also works against you when you step into the role of a borrower. As an example, consider that the median price of a home in 2013 was about $200,000. Now assume you take out a 30-year fixed mortgage to purchase a home. You’ve worked hard and have 10% in cash to put down. This leaves you with a $180,000 mortgage. Going interest rates for borrowers with good credit are around 4.25%. Even though these are still historically low rates, at 4.25% you can expect to pay approximately $138,960 in interest alone over the life of the loan! That’s in addition to the $200,000 cost of the house. Now let’s pretend that your credit is a little below average, making you a slightly higher-risk in the eyes of a bank. You’re still able to secure a loan, but the bank wants to charge you a 5.00% interest rate in order to compensate for the risk they take on by lending to you. At a 5.00% rate, you can expect to pay $167,760 in interest over the course of the loan, or almost $30,000 more than you would pay with a better credit score. That is some serious money.
On top of the impact interest rates have on our personal investments and debt payments they also affect our spending and saving behavior. Imagine that your bank was offering a savings account with a 10% interest rate. All else being equal, would you be more or less inclined to save? That’s right. Most people would choose to direct more of their personal income towards savings when interest rates are higher. If millions of people were forgoing spending in favor of savings, this would have a significant effect on the overall economy. Interest rates matter. What about high interest rates when you’re the borrower? As we saw above, even a small increase in an interest rate can lead to much larger debt payments. Generally speaking then, higher interest rates tend to depress credit growth and in the end can muddle economic activity as consumers take out fewer loans.
As you can see, interest rates can have a very direct and often significant effect on our personal financial situation, not to mention our saving and spending patterns, and the broader economy. Although we’ve only skimmed the surface, suffice it to say that interest rates are worth understanding, if for no other reason than to help you make smarter decisions with your money.
Carrie Tallman, CFA
Director of Research
This is the fourth post in a series of six blog entries focused on topics that might be of interest to the Millennial generation.
In my experience, one of the largest financial decisions clients struggle with is the decision to rent or purchase their residence. There is not necessarily a right or wrong answer, and every individual’s situation is different. However, there are some scenarios that may help guide you in making the right choice.
Let’s start with buying. Here are five factors that may make it more beneficial to purchase:
- You like the idea of “forced savings” – as you pay your mortgage your balance owed is reduced. Building this equity in your home will create a form of savings for you. Since the value of the home is locked in, you can’t squander it away on dining out or shopping. You realize the savings once you decide to sell it.
- You think the tax incentives are attractive – when you file your taxes, you will be able to deduct mortgage interest. Property taxes will also add a nice deduction. If you do any energy-efficient improvements, you could be eligible to deduct those expenses. Another bonus is that depending on your situation, any capital gain from the future sale of your home is free from federal income tax.
- You want stable payments– typically your mortgage payment will never change, while rent is more susceptible to rise with inflation. Purchasing may be right for you if you are looking for a stable cost of living.
- You dislike the restraints placed by your landlord – often when renting you must get everything approved. If you want to paint, rip up the carpet and put down hardwoods, take out a wall or have a dog, then owning probably makes more sense. Home ownership allows you to customize a space and really have a place that you can call home.
- You value a second-income stream – by owning a home, there is potential to create additional income by renting part of it out. If you have an extra bedroom, finished basement, or a garage for storage, it’s possible to rent to friends, family or others to help cover your mortgage payment.
- Bonus – quite possibly the biggest bonus of all is you will be debt free in retirement with no mortgage payment. You will always have the expense of a rent payment if you continue renting.
But guess what… buying may not be right for everyone. It’s important to remember that there is more to owning a home than just a mortgage payment. Between maintenance, fees, and taxes, the costs can add up. And other factors may contribute to make it an unwise choice for some people to purchase. Here are five factors that may make it more beneficial to continue renting:
- You plan on moving – home ownership is not a short-term investment. If you think that you may be moving for any reason within the next 3-5 years, it’s wise to continue to rent. Once you are settled, revisit the topic!
- You don’t have good job stability – of course you can never be 100% certain if your job is stable, but the possibility of your income going down could greatly impact the type of home you can afford. If you expect to quit your job, or anticipate being let go, hold off on a home purchase until there is a bit more certainty about the future.
- You just aren’t that handy around the house – as a renter, you don’t have to worry about maintenance issues. If the pipes burst (something that the author can relate to), then the landlord is responsible for repairs. For a homeowner, it’s 100% on you. It’s up to the owner to paint, shovel the drive when it snows, and fix the garbage disposal when it’s broken. If you aren’t ready for the hassle or expense involved with being the fixer-upper, then perhaps home ownership just isn’t for you.
- You have a low credit score – having a solid credit score is vital in purchasing a home. While it may not prevent you from getting a mortgage, it could drastically affect the interest rate that you receive. If you have a score below 700 it would probably be best for you to rent while paying off debt and building up your credit.
- You don’t have money for a down payment – if you don’t have any cash squirreled away for a down payment, it may not be the time to purchase. If you don’t have a 20% down payment you will have to pay PMI (private mortgage insurance) which will increase cost of monthly payment. Use this time to save and budget before taking the plunge.
These are some of the basic pros and cons of renting vs. buying. Since every situation is different, it’s always best to speak with a financial advisor about the circumstances surrounding your own decision matrix.
With correct planning and consideration, we’re sure that you will come to the best decision for you!
Ashley Woodring, CFP® Financial Advisor
This is the third post in a series of six blog entries focused on topics that might be of interest to the Millennial generation. If you would like to see our attempt at making these subject matters entertaining, visit our YouTube page to see a video version of this article.
“Roth IRA” and “traditional IRA” – these are terms that are bandied about willy-nilly by financial advisors and others in the business. You’ve often wondered what the difference is but haven’t asked, because you feel like you should know already. You nod along, meaning to Google it when you get home but of course you forget as soon as you step through the door and directly into a pile of something your loving pet left for you to clean up. Allow me to help! With the IRA definitions, I mean – not the mess. That’s all you.
First, the similarities – both are types of retirement accounts that allow the investments within them to grow without requiring you to pay taxes on any realized gains. So if you buy a stock for $500 and sell it for $1000, you don’t have to pay capital gains taxes on the $500 you made. Awesome, right? Another bonus – you don’t have to pay taxes on any dividend or interest income that you earn within either type of IRA. In a regular brokerage account you would have to pay taxes on realized gains, dividends, and interest income, which would cut into your portfolio return.
So what are the differences? Both traditional and Roth IRAs feature tax advantages on either contributions or withdrawals, but not both. A traditional IRA allows you to make tax-deductible contributions (so the funds you put in there are not being taxed as income). However, when you withdraw the money after age 59 ½, it will be taxed as ordinary income at your marginal tax rate.
Conversely, contributions to a Roth IRA are not tax-deductible (so this is income that has already been taxed). But when you withdraw the money (assuming you’ve had the account for at least 5 years and are older than 59 ½) it’s all tax-free! That’s why traditional IRAs are called “tax-deferred” accounts and Roth IRAs are called “tax-exempt” accounts.
Now, as with anything the IRS gets its hands on, there are all kinds of rules, guidelines, exceptions and so forth when it comes to how much a person can contribute to either type of account, how much is tax-deductible, what types of early withdrawals are allowed without a penalty, etc. Rest assured that all of this information is available on the internet, so I will spare you the details. Better yet, call your financial advisor and ask him or her how the rules affect your unique situation. There are so many different scenarios that, if I were to attempt to address them all, it would completely defeat the purpose of this blog, which is to simply explain the main difference between a Roth and a traditional IRA.
Because your situation is unique, you should talk to your financial advisor about the different account types and which ones are best for you. But now, when you hear phrases like “tax-deferred” or “tax-exempt,” “Roth” and “traditional IRA,” you can nod along knowledgeably.
Sarah DerGarabedian, CFA Portfolio Manager
This is the second post in a series of six blog entries focused on topics that might be of interest to the Millennial generation. If you would like to see our attempt at making these subject matters entertaining, visit our YouTube page to see a video version of this article.
You’ve recently graduated from college and you have a load of student debt. It can be overwhelming. You think it will take forever to pay it off. To make matters worse, you know you are supposed to be saving for retirement but you feel like you can’t because you need to pay off your student loans first.
To make the best financial decision it is important to remove the psychological barriers that often accompany the ‘saving versus paying down debt’ trade-off. The millennial generation is particularly opposed to debt – more so than older generations, so they tend to pay their student loans off before they start saving. Unfortunately, this could be the wrong choice.
The long run average of large company stocks is 11.3% (1950-2013). If your student loans are at an 8% interest rate, you would be better off investing money over and above your minimum loan payment if you have the risk tolerance for investing the money in equities.
Maybe an 11.3% return sounds unrealistic. It’s common for this historical return to seem disconnected from the present. A common psychological condition causes us to take recent past experiences and extrapolate them into the future, creating a false sense of predictive ability on what the future holds. If the good times are rolling, they will always roll. If we are in crisis, we will be in crisis for the foreseeable future. But the truth is that things change. Our economy is cyclical in nature and that’s why we use long-term historical observations to make long-term decisions.
Even with the worst recession since the Great Depression the average return of large company stocks in the 10-year period from 2004 -2013 was 7.4%. And while that’s not huge, you may be willing to take the chance that we won’t soon see a repeat of the worst stock market period in history. Those loans will get paid off eventually and you’ll have more money in retirement simply by saving more and saving earlier.
Don’t forget about your employer match on your 401k. If you have a 401k match, by all means take it! Even if your student loan interest rate is 12%, you’d be better off (after paying the minimum) putting enough money into your 401k to get the free money. That’s a 100% return, guaranteed.
Harli Palme, CFA, CFP®
It started with anecdotal evidence: a conversation with a co-worker about a group of professionals he spoke to about their 401k. The wiser (by which I mean older) folks were asking about the outlook for the economy and how they could maximize their 401k contributions. But the young man in the group, who was in his early 30s, expressed complete contempt for the stock market. All of his money, he said, was in cash. Then a client of mine who is nearing retirement called me just to tell me about a dinner he went to where the topic of investing came up. He was shocked at how vehement the young people at the table were about not investing in stocks due to their risk.
Since then I’ve read about a growing body of evidence coming from surveys and other research that suggests that the younger generations are too conservative in their investments. Gen Y is saving but not investing aggressively enough. The problem is that they distrust financial institutions (we don’t count) and believe another financial meltdown is all but imminent.
Gen Y, we don’t blame you. You were in your teens on Sept. 11, 2001, which had to have rocked whatever concept of stability you had. By the time you were old enough to know what the stock market was, the technology-driven crash of 2001-2002 was causing strife in budding 401k plans. And just when you were starting to dream about home ownership the housing market was spiraling out of control in 2008-2010. Many of you watched your parents go through extreme financial duress during this time period, something you were well old enough to understand.
It’s no wonder that Generation Y is too conservative. Your generation doesn’t have the benefit of personally experiencing the roaring 80s and 90s to boost your confidence about the markets. You don’t know who Crockett and Tubbs are. Looking at historical stock returns on paper just isn’t the same as living through it. And it’s hard to understand why men ever wore over-sized shoulder pads, but they did. Even the last five (amazing) years of positive stock markets seems like mere payback for the horror of 2008-2009. Despite this, we have to remember that stocks have historically provided the highest long-term return. No matter what your steadfast beliefs are about the future of the economy, it probably carries no more predictive capacity than the next differing opinion. That’s why we look to history as a guide, rather than trying to guess the future.
When you look at stock volatility over long time frames, it isn’t nearly as risky as the day-to-day movement would have you believe. In the last 87 years large company stocks’ annual returns ranged from -43% in the worst year to +54% in the best. That’s quite a spread! But those same stocks in any given 20 year period (starting on any given day in any year) averaged returns in a range of +3% in the worst 20-year period to nearly +18% in the best 20-year period. That includes the Great Depression and the market crashes of this century. That’s a lot easier to swallow. You have a long time before liquidating your accounts for retirement – probably more than 30 years, so you should be taking a longer term view.
And let’s not forget about inflation. That cash that’s in your 401k is doing less than nothing for you. Long run inflation is around 3%. If you are getting a 0% return on your cash, that is actually -3% in real dollars, guaranteed.
Saving money isn’t good enough. Millennials need to invest with a little more oomph. Yes, diligently putting away $500 a month for 30 years is hard work and no one wants to see their money shrink. But consider this: if you get a modest 4% average return on those savings, you will have $347,000 in retirement; if you double that return to 8% an amazing thing happens: $745,000. Taking risk means a lot of ups and downs along the way, but potentially twice the money in the end. If you can go cliff-jumping with your friends, you can buy stocks, right? (No? Was that just my friends?)
There is no reward without risk, to be sure. Any investment plan should be done with the full comprehension of the volatility, range of outcomes and potential for return. There certainly is risk in losing money in the stock market over short and intermediate time periods. However, those losses only become permanent if you sell out during periods of decline. It seems all but certain that an all-cash/fixed income portfolio is doomed to growth too slow to possibly reach any long-term financial goals.
Harli L. Palme, CFA, CFP®
A Gen-exer who believes all of the above applies to her generation too, except the part about over-sized shoulder pads.
Many a financial advisor has been asked how to balance saving for retirement while also funding a child’s college education. Which brings up the question: Is it a parent’s responsibility to pay for their child’s education? And is it possible to do both? As with most difficult questions, there are no black and white answers.
While I’m not a parent myself, I’ve heard passionate positions on both sides of the argument. Some parents didn’t receive any college financial support and feel pride in having paid their own way, working and going to school part time in order to earn their four-year degree. Others, myself included, felt fortunate enough to receive monetary support from their parents, and the gift of graduating with a four-year degree debt-free. In a perfect world, most parents would choose to provide for their children’s education but unfortunately not everyone has the income to do it. In that case, what is the best course of action?
Before tackling that question, there is some good news. A recent Gallup Poll shows that expensive, prestigious colleges don’t necessarily produce happier people who lead more fulfilling lives. Specifically, graduates of colleges in the bottom-ranked U.S. News & World Report schools faired just as well as graduates from top-ranked colleges in terms of overall well being. The poll looked at several quality of life factors, including income level and “engagement” in graduates’ careers. See the article here. Of particular note, high college debt loads had a meaningfully negative impact on graduates. Sadly, 70% of students who borrow have a national average debt balance of $29,400.
I would tend to agree with these findings. As a state university graduate (go Gators!) I received a great education, learned and worked with some world-renowned scholars, and feel pretty darn satisfied in my life and career today. All-in, college cost my parents about $12,000 a year. Granted, that was seventeen years ago. Today, attending the University of Florida costs about $21,000 a year, including room and board; still a pretty attractive price tag considering sky-high tuitions at some of the top private colleges and universities. Don’t get me wrong, if money had been no option and my grades were a little better back in high school, I would have jumped at the chance to attend an Ivy League school. Such were not my cards. The point, however, is that state schools often offer a phenomenal education at a fraction of the cost of many private schools which can make the dilemma of whether to save for your retirement or your child’s secondary education a little less challenging.
However, different students have different needs and may be searching for what those more expensive colleges offer – whether that’s a smaller setting, specific academic programs or special facilities. So if your child is interested in what the pricier schools have to offer, consider applying even if you don’t have all the funds available to pay. Some of the most expensive schools have a tremendous amount of scholarship money available for qualified students in need. It’s a great reason for your child to stay motivated with grades and extracurricular activities throughout high school.
But back to our main question: should you save for your retirement or your child’s college education? Ideally, everyone would do both, but given a median US income of about $51,000, this isn’t always possible. Taking an economic perspective, the classic airplane analogy comes to mind: when the oxygen masks come down due to a drop in air pressure, air regulations require parents to first secure their own oxygen mask before helping their child. Why? Because we can’t take care of someone else, children included, until we’ve first tended to our own needs. I believe the same holds true regarding retirement savings and a child’s college education. Funding your child’s college education at the expense of your retirement savings plan implicitly shifts the financial burden of retirement from parent to child. Essentially, parents who first try to support their child at the expense of their own retirement are making the bet that their child will earn more than them, or at least enough to provide for them in their twilight years. While parents may have good intentions, this dynamic can ultimately prove unhealthy for all parties involved. As with the oxygen mask analogy, a sound strategy would suggest first meeting your own retirement savings needs and then, as you’re able, contributing to a child’s college fund. In the end, you’ll have peace of mind regarding your own financial security and likely be in a better position to further support your child – who may just be thriving on her own.
Carrie A. Tallman, CFA
Director of Research