In this article, we examine the potential 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, even though many of them are already in – or fast approaching – their retirement years. And this lack of savings may end up impacting their grown children.
An 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.