Tuesday, June 24, 2014

Retiring with Children

Some of us have children at an early age and they are self-supporting when we enter retirement.

Many of us don’t.

For us late starters, having children who are young adults when we enter retirement is a substantial financial risk. I was reminded of that fact by an article written by Adam Davidson in the New York Times Magazine entitled “It’s Official: The Boomerang Kids Won’t Leave”.

Davidson writes, "One in five people in their 20s and early 30s is currently living with his or her parents. And 60 percent of all young adults receive financial support from them. That’s a significant increase from a generation ago, when only one in 10 young adults moved back home and few received financial support."

Davidson goes on to argue that this isn't a temporary financial blip, but may be a longer term trend.

I am also reminded by clients who plan on their children graduating from college in four years. Good luck with that one.

A Time magazine article from 2013 entitled, “The Myth of the Four-Year College Degree”  reports that, "According to the Department of Education, fewer than 40% of students who enter college each year graduate within four years, while almost 60% of students graduate in six years. At public schools, less than a third of students graduate on time.”

Each additional year that child remains in college means not only more tuition and books, but more rent and groceries and another year of not earning income. Losing early years of income can have a significant impact on your child's lifetime earnings, so it’s not exactly a bonus for  him or her, but tens of thousands of dollars for unplanned college expenses may be difficult for many retirees to deal with.

The surprises may not be college-related and, in fact, may appear long after your child's college years. I have spoken with several retired couples whose children (or grandchildren) had their own financial crisis. Not helping wasn’t an option.

Retirees with middle-aged children are often called upon to help after a health crisis, a substance abuse crisis, or extended unemployment.

Additional unplanned years of college and parental support don’t always happen when something goes wrong. They can also happen when something goes right.

My oldest son decided to go to med school and, after his third year, elected to take leave for two years to earn a masters degree. I’m very proud of my son and don’t regret one penny that I have spent on his education, but it wasn’t in my retirement plan.

The point is that those of us with children will retire with greater financial risk than will childless couples. When I think about the major risks of retirement, I think longevity risk, market risk, healthcare risk and long term care risk, but our children also represent a major financial risk that our plans need to consider.

I would start by planning for at least five years of college, if your kids haven’t already graduated. Then, I’d recommend reading the Davidson article and considering the distinct possibility that your children won’t simply go to college for four years, get a job right away, and become largely self-supporting.

Maybe you and I did it that way, but nowadays it isn’t that common.


  1. Good thought. As an advisor of almost 20 years, I spent much of the first half of my career very focused on the investment management part of financial planning. However, as my practice and advice has matured, I have realized that much planning, while important and useful, has nothing to do with how life will actually unfold for people. It is, in my humble view, just as important when thinking of the future to consider the limitations of a perfect plan and remain flexible and able to adapt. Almost all of us have to do it. In fact, my practice is much more influenced by psychologists like Ken Dychtwald and others who discuss the changing nature of our lives, personal relationships, expectations for work, etc... than financial firms and their commentary on markets and investments.

  2. As a parent of several kids in their 20s, I have found that each is different but falls within general classes.

    1. Two kids graduated in 4 years. One graduated in the spring of 2008 (not a good time) and needed limited support as it took 18 months to get a good full time job. The other one got a job immediately upon graduation. Other than some early cash flow support, nothing else was needed.

    2. Another child struggled at university for a year, didn't complete, worked temp jobs for a year and has had a full-time job since then. That child lives at home but covers expenses. Living at home has allowed for significant cash and retirement savings already. Has already paid off the car. This child could move out, but we have the room and building a large cash and retirement account cushion at this time for reserve funds is important as the work is in manufacturing which, as we have seen, can get off-shored or moved to another state for tax breaks in a heartbeat.

    3. Another child graduated last fall from a two-year school and has been unfocused about getting full-time career work. Works hard but it is part-time positions. Still requires some financial support. This child is our biggest current challenge. We are holding fast on not paying for additional schooling until we see some real focus on career plans.

    We have told the kids that they need to plan on graduate school as their own costs and that they need to have a financial plan where it would be done for a specific reason with a highly likely payout. Otherwise, it is just a very expensive hobby.

  3. We are in the same position and the financial demands can definitely take away from your retirement savings. We have encouraged our kids to work from the time they are 15 and save their money in a bank account so they are well-prepared to help cover these costs.

  4. Interesting article here that lays out $130k as household gross income needed to accomplish the "American Dream" for family of four including retirement savings for two adults and college savings for two children.

    Since most families don't make $130k for many years in their 30s, 40s, and early 50s the drivers for low retirement savings, high student loan balances, and HELOCs in many households becomes obvious.