Financially Fit 50

“Your Kid, Their Money”

Editor’s Note:
Money Makes the World go Around

Okay, let’s jump in the way-back machine.  It’s the 80′s and you are either in college or just starting a job. When you were in your 20′s were you seriously mulling over your retirement plan?   I remember graduating and getting my coupon book (remember those?) to pay off my college debt.  I flipped to the end, added it up and was dumbfounded that at $100 a month, I would be 30 years old before I paid off that debt.  I remember thinking how old that was.  The chances are if you felt like that in your 20′s, so do your kids, now.

Do as I say not as I do

Now that we are in our 50′s, a lot of us are playing “catch-up” when it comes to our finances or according to one survey, have just decided to put our heads in the sand.  The U.S. Department of Labor cites a survey which found less than half of us have actually calculated what we need to retire.  So, if you have raised or are raising your kids to be a better version of you, I suspect you want them to enter their version of retirement in a better place than you are now.

MyFit50 has reached out to a financial planner who helps new investors, like your kid, navigate planning for their future.  Ali Criss with Financial Insights also helps parents who’s kids come to them with money questions.  We asked her five “typical” questions to get the conversation started.

Five Questions For You and Your Kids

Question:  “My child just graduated from college.  She has some tuition debt but wants to start saving.  However, with her new job, she can’t do both.  What should I tell her?  Does it make more sense to pay off the debt first?”

Ali Criss says, “Dealing with student loan debt after college can seem like a daunting task.  Many students leave college with multiple loans of varying types.  The first thing to consider is loan consolidation.  Loan consolidation can simplify loan repayment into one monthly payment and may also lower the interest and payment amounts.  There is no fee to consolidate your loans. Check out www.loanconsolidation.ed.gov to see if this option is right for your child.

It is a good idea to pay off your student loans monthly and take advantage of any employer sponsored plan. Employees should be given the option for enrollment after an initial probationary work period normally around six months.   Many employers offer 401k, 403b or 457 retirement plans and some may have a matching component. It is always a good idea to take advantage of the full employer match which is normally in the range of 1-6%. Why would you throw away free money?  If the employer does not offer a matching component, sit down with your child and analyze cash flow to determine how much he/she is comfortable putting into the plan.  Even choosing 1% to start is better than declining the tax advantaged retirement plan.

If the new employer does NOT offer an employer sponsored plan there are options.  I would recommend starting a RIRA (Individual Retirement Account) with a local financial institution and set up monthly deposits from the bank.  In 2013, you can contribute up to $5,500 into a RIRA which equates to $458/month. Even if your child can only contribute $25 per month into a RIRA it is good practice to get into the habit of saving monthly into a retirement account.

Bottom line:  Saving something is 100% better than saving nothing.”

Question:  “My child has gotten a good job with matching 401K benefits.  I am at an age where I am in the “conservative” investor bracket but should I counsel my child to do the same?”

Ali Criss says, “Risk tolerance, your ability and willingness to tolerate investment risk, varies with age, time horizon, financial goals and personal comfort level. Risk tolerance determines how “conservative” or “aggressive” an investment portfolio will be. Your child, who has a much longer time horizon until retirement, will not be in the same risk tolerance category as you are.  He/she has a long time to save and weather market fluctuations and actually may be hurt in the long run by taking too conservative of an approach.”

Question:  ”My 23 year old works at a job that doesn’t have health or retirement benefits.  He has roughly $500 a month in disposable income and is wondering whether he should put that to health benefits or some sort of savings plan.  With obamacare, what makes the most sense?”

Ali Criss says, “Most people will be required to have health insurance starting January 1, 2014.  If you are an individual making less than $45k per year there may be tax credits available to help you purchase a health plan. Additional information about the new health care legislation and potential tax credits can be found at www.healthcare.gov.  If your child fits in the parameters, he/she will be able to apply for a plan through the new “Health Insurance Marketplace”.  Refer to your state’s insurance website to find all the information you need in regards to available plans and discounts at http://www.naic.org/state_web_map.htm.

Pay for your health care plan first and put any remaining cash in a RIRA (Individual Retirement Account) that can be set up at a local financial institution.  Also, keep in mind, that prior to starting a RIRA your child should have at least 3-6 months living expenses saved in liquid “emergency fund”.  You can utilize your local bank savings accounts or check out online savings options that may pay better interest rates for savings as their “brick and mortar” counterparts.  Some examples of FDIC insured online savings include capitalone360.com or ally.com.”

Question:  “My daughter wants to save but is only working part time and lives at home.  At some point, she hopes to get a full time job and find her own home.  Would a ROTH IRA be the best plan for her?”

Ali Criss says, “After setting up an emergency fund of 3-6 months of living expenses in a liquid savings account, the RIRA(Individual Retirement Account) would be a great plan to get started. You can set up monthly payments direct from your bank account into your RIRA.  But keep in mind; you can only contribute as much as you make in the calendar year into the Roth. For example, if your child earned $1000 in 2013 he/she can only contribute $1000 into the Roth.”

Question “My newly graduated 21-year old son says he would rather put his disposable income into a new car or travel as opposed to a money market or some sort of financial plan.  Isn’t there a formula that shows just how much he could expect to have if he socked money away each month instead of putting that money into a car payment?”

Ali Criss says “It is important to consider both life experience based purchases and retirement when looking at your monthly disposable income.  Possibly your son could consider doing both?

You can stress the importance of both retirement and travel and ask your son to look at putting away a portion of his monthly disposable income into a retirement account and the remainder into travel/car savings.   For example, if he has $500/month extra to put away you can suggest $400 into a retirement plan and $100 dollars into a travel savings account.  Let him know that saving now will make sure he can continue travelling later.

There are many calculators online that can calculate the time value of money.”

 

 

 

 

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