Thursday, March 15, 2007

a new retirement plan

Out there a fellower blogger JW at his blog Need to be Debt Free. He's a 40-something guy on the journey of being debt free. He's trying very hard to follow a plan and still retire. Yet he worries about funding college and paying off the house, although he is far behind pace in retirement.

What to do? Well the answer is save for retirement because there are no loans for retirement. But there are loans for college. Also paying off the house faster isn't as important because the house will get paid off eventually. But when you retire, a person needs a pot of money to generate income to pay for repairs, property taxes, and general maintenance of a home. So retirement savings it is.

But what about new retirement plan of living off your kids? Sound nuts? Here is a website on the sandwich generation. Mostly it's boomers who are financially required to help their parents in retirement, while paying for college for their children.

The new retirement plan is to support your children so much that when you retire they take care of you. I don't advocate or think this is sound judgement. However many parents are making college and their children's lives such a huge priority that it leads me to question whether this is a new retirement strategy.

These parents not only moved cross country but are paying $50k/year for tuition at a private high school for their daughters. This is in hopes of going to a "good" college. They have no retirement, have sold their home to fund tuition, moved cross country and for what?

I imagine in 20 years they'll be struggling to retire, and perhaps expecting their daughters to help them out. They'll play the guilt card about all the sacrifices they have made to allow their daughters to become successes in life.

Of course the negative to this, is what if their daughters do not succeed in life? What if their daughters are unable to support them? What if they marry someone whose parents also need support? Or work in careers that are not lucrative?

These issues make the idea of basing a retirement plan on your children's support ridiculous. There are so many variables that cannot be accounted for. And yet parents are still struggling to pay massive college tuition bills and spend any amount to assure their child goes to Harvard.

Parents be wary of such a plan. A more viable plan would be to fully fund and secure your own retirement so you never need to ask for money. Then instead help your grandchildren's tuition, trust me your kids will thank you two-fold. For allowing them to not support you and the gratitude that they don't have to foot their own children's college.

Then they in turn can perhaps save for retirement and fund their own grandchildren's college account.


traineeinvestor said...

Relying on your children to fund your retirement is one of the dumbest ideas I have ever heard. Sure, it used to be the practice in some places (usually poor agricultural ones) but I would view this suggestion as irresponsible. Even if your children were willing and able support you for up to 40(?) years in retirement they would most likely pay their own significant price for doing so in terms of funding their own retirement, their own children's education and their own lifestyle. I would expect that being asked to financially support the in-laws for several decades would put a lot of stress on a marriage as well.

Whoever suggested this rubbish should be shot.

Living Almost Large said...

I fully agree, but the truth is how many parents are saving for college ahead of retirement? So tell me exactly what retirement plan are they on?

JW said...

First I'd like to thank you for addressing this issue in your blog. Secondly, my wife and I have found your assessment of this issue very well thought out and explained. And, after reviewing it we completely agree with you, that it would behoove us to put our focus on our pending retirement instead of college savings for the kids. Additionally, we're sharing your advice with friends.



Never Again Debt said...

Parents should act like grown-ups and worry about themselves and their own retirements. The kids, once of age, will be alright. Good article. Thanks for sharing.

Living Almost Large said...

It happens though that more and more parents are paying for college instead of retirement.

Not so far fetched it seems anymore.

Living Almost Large said...
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Tiredbuthappy said...

Good post, but what a scary thought. Unfortunately, in my family, this is all too real.

I've expressed concern to my mother about what I see as her lack of adequate retirement planning. Finally, she exploded one day, and revealed that when I was saying "maybe you should save more" and "shouldn't you get health insurance?" what she was actually hearing was "I don't plan to help you" and "you can't live with me when you retire".

I'm very, very concerned about supporting her. If it comes to that, I know my frugal lifestyle is going to be hard for her to adjust to. She is used to very comfortable surroundings, expensive foods, lots of travel, etc. It's going to be hard for me to get her to eat things I can afford, wear clothes that I can afford, etc.

I'm just hoping that I'm wrong and she won't run out of money.

Living Almost Large said...

Tired but happy I hope your mom is okay with living a simple life later.

But yes when you say you don't want to support them they get mad. But why is it that you have to support them? Perhaps it's tough love, but perhaps it's because they feel you owe them for 18 years of life before and during college.

The Digerati Life said...

I enjoyed this post and your recommendations. I agree that with limited funds, the need to prioritize is necessary. And the way you have explained how things should be prioritized is how I would handle things as well. This hits home as I have relatives who have given everything to their kids to the detriment of their retirement plans. Why? Because they think they can always "catch up" later. There's this level of denial underlying their choices. They think perhaps that they'll strike it big later in life somehow and all will be well....Retirement is just too far away to worry about right now, so they say, and they feel guilty about not giving the best to their kids. But your post makes great arguments about handling situations like this. Thanks for the insights!

Living Almost Large said...

A woman on a board I vist actually has 7 children. She and her husband are 35-40ish, no debt, paying off their house in another 5-7 years. They are not saving at all for retirement, apparently it's too risky but paying off the mortgage is a guaranteed 6.75%.

I think she's putting too many eggs in one basket. Also her plan is to cash flow college after they finish paying off the house, because their oldest will be ready for college by then.

Problem I see with her plan? When will they save for retirement? And no they have about $40k saved for retirement which is peanuts. It isn't even 1 year of salary for them.

Do I see an issue? Yes. So this woman's plan is and she said is "to have her children support her."

Living Almost Large said...
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PF101 said...

I absolutely agree. I get a lot of flack when I throw out the "there are no loans for retirement" line and recommend that people fully fund their retirement before starting to save for education. But it's the smartest thing to do. I also tell people not to ever count on getting money from someone in the future. You have no idea what will happen. Someone could die, you could have a falling out or one of many other things. You are and can be the only person responsible for your retirement.

Thanks for the great post.

Living Almost Large said...

It's a load of crock to believe that someone else (namely your kids) will be able to bail you out of not saving for retirement.

They could be in serious financial difficulties themselves. And depending that they will be successful and able to provide for you is sheer insanity. They need to provide for themselves not you.

Loan said...

I'm 31 and regularly saving for retirement now - who know's what the world will be like in 60 years time. Ok... so we won't all make it to 60 but someone you know and love will then benefit from your savings... so no loss surely?

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Cara Larose said...

From the get-go, you should have a game plan on how you'll save up for retirement, to make sure that you get to live a good life while supporting your family. Also, it is advisable to prepare a fail-safe plan if you think things won't go your way.