Retirement

In this article, we examine the impact of a parent’s financial planning (or lack thereof) on their grown children.

Baby Boomers and (no) pensions

The Baby Boomer generation is the among first generations where pension income is likely not their main source of retirement income. In 1978, Congress passed the Revenue Act of 1978, which included a new section of the Internal Revenue Code, Section 401(k). Section 401(k) allowed employees to avoid being taxed on deferred compensation.

This meant that corporate employers were able to create plans, commonly called 401ks, that allowed employees to contribute to a retirement account using salary deferrals that were not taxed. As companies phased out pensions due to high costs and a changing workforce, more of the burden for retirement savings was shifted to employees.

However, not all Baby Boomers have saved what they needed to for retirement. And this lack of savings may end up impacting their grown children.

A recent article (link opens in new tab) from Yahoo! Money highlights this potential problem. The article cites an alarming statistic: “The median amount saved by those between 56 and 61 is $21,000, according to the Economic Policy Institute.”

Social Security may not be enough to make up the gap

I’ve talked in this space before about social security and how it may not make up the gap. According to Fast Facts and Figures about Social Security – 2019, as of December 2018 the average monthly retirement benefit for men is $1,627 and for women is $1,297. So the average retired couple, according to these figures, may be receiving about $35,000 per year from Social Security. Unless a couple has another income source, this average couple may have a pretty difficult time making ends meet. Now you can see why the median amount saved of $21,000 is probably not enough.

Grown children may have to help parents financially

And that’s where the grown children of Baby Boomers may be impacted. I personally know families who have had to make difficult choices in taking care of their aging parents. This could include parents moving in with their grown children and their family; grown children paying for some (or all) of Mom and Dad’s monthly bills; grown children quitting a job to care for a sick parent; and more.

Ask some uncomfortable questions

Do you know what your parents’ financial situation is? Even though the conversation might be difficult, in my view it’s always better to know the facts. Even if what you learn could be troublesome, it’s better to know in advance when you can do some planning around the possibilities than to be taken by surprise.

Do you have siblings? Talk things over with them and see how each of you might be able to help. And don’t forget to talk it over with your spouse as well.

Perhaps most important, make good saving choices now for yourself so that you don’t put your children in the same situation.

Need help with these conversations, or planning for your financial future? Contact Tree Fort Financial for help.

In this article, we outline some options for using retirement savings plans to save for future needs.

What are some options for saving for retirement using retirement savings plans?

A financial advisor can help provide you with information specific to your situation and also, provide you with practical advice so you know exactly what steps you should take right now to plan for the future. This article is intended as general information only, not specific advice.

One of the first questions I hear from new clients is typically, how much should I save for retirement?  Once that question is addressed, the second part is: where should I save for retirement?  Where a person saves can have many impacts and must be carefully considered. Here is a rundown on some of the basic retirement savings plans that might be available – but they don’t include a piggy bank! 

Note that if you are married, there may be additional options open to you based on your spouse’s work situation.

401k or 403b Option

If your employer offers a 401k, 403b, or other defined contribution plan, that’s often the first place to consider saving.  Contributions to this account can come directly out of your paycheck, making it easy to save automatically. Often these plans will offer both a pre-tax and after tax (Roth) savings option.  Depending on your tax situation now and what you expect it will be later, one of these may be a better choice.  Consult an advisor and talk to your company’s representative for more information. 

Many employers also offer matching contributions or profit sharing, meaning that the employer may contribute to your retirement savings account in addition to whatever you are contributing from your paycheck.  This can be a great benefit that you might not earn if you didn’t participate in your employer’s retirement savings plan. 

IRA Accounts

If your company doesn’t offer a retirement savings plan, consider opening an IRA (Individual Retirement Arrangement) or Roth IRA at an inexpensive online brokerage.  According to the IRS (https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits), in 2019, the maximum amount you can contribute to these accounts is either a) $6,000 for those under age 50 ($7,000 for those 50 and over), or b) your taxable compensation for the year, if your compensation was less than this dollar limit. The main difference between IRAs and Roth IRAs is related to when taxes are owed on the money you contribute and the earnings. 

IRAs (https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras) are pre-tax, meaning that the money you contribute does not have taxes removed before you contribute.  When you withdraw money from this account in retirement, you must pay taxes on withdrawals. 

Roth IRAs (https://www.irs.gov/retirement-plans/traditional-and-roth-iras) use contributions after tax has already been taken out.  When you retire, no taxes are owed on the withdrawals. 

For either an IRA or a Roth IRA, it can be helpful to set up automatic contributions to the account directly from your checking account so you are regularly, and automatically, contributing.  There are many other nuances and rules associated with these accounts, so be careful to follow IRS guidelines (https://www.irs.gov/retirement-plans/individual-retirement-arrangements-iras).

SEP IRA and Simple IRA Accounts

If you’re self-employed, there may be other options available for you, such as a SEP IRA (Simplified Employee Pension Individual Retirement Arrangement) or a Simple IRA (Savings Incentive Match PLan for Employees Individual Retirement Arrangement).  Here is some basic information about these types of accounts.  Check irs.gov for more information. 

SEP IRAs (https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-sep) can work for businesses with no or few employees, and require the employer to contribute to the account, up to $56,000/year per IRS rules in 2019.  Simple IRAs (https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-ira-plan) can be better for larger businesses, and permit employees and employers to contribute at different levels.  Employees/participants can contribute up to $13,000/year, while the employer must contribute a specific amount (with caveats): a 3% match or 2% flat contribution per IRS rules in 2018. 

Note that the federal government establishes annual contribution limits, early withdrawal penalties, and other rules which must be followed when contributing to – or withdrawing from – a retirement account. 

Most importantly, begin now and start saving consistently. 

Your Specific Situation

There are many additional factors that impact where you choose to save your retirement money, including tax implications now and later; earning potential of your savings in these accounts; and what withdrawals are allowed before and after retirement.  To really get a complete picture of your personal financial situation, a financial planner or tax professional can help.  Consult with yours to ensure you’re making a decision that is best for your financial health, both now and in the future.

The information and illustrations presented above are hypothetical and do not represent the return on any particular investment nor specific financial advice. All investing is subject to risk, including the possible loss of the money you invest.