Will you still be supporting your children when they’re grown? According to a new Wells Fargo/Gallup poll, 46% of investors who have one or more grown children are providing them with financial support. That can have a negative impact on the older generation’s retirement savings, as well as on the prospects for the younger generation.
“People have not saved nearly enough for retirement,” says Wells Fargo Advisors High Net Worth Strategist James McKown, who adds that there has been a trickle-down effect in this arena. “If you want your kids to be savers, it’s something you start from the very beginning.” That means starting to teach financial lessons when the kids are young — and continuing the lessons as the kids grow to adulthood.
While results vary among families, of course, here are some strategies that have worked for parents and grandparents hoping to help their offspring save for retirement and other financial goals.
1. Begin early — really early.
Anyone old enough to open a present is old enough to grasp money management skills. McKown began giving his kids gift certificates for Christmas when they were young to help them understand the value of a dollar. You can also encourage children to divide their allowance into three areas — spending, saving, and giving — and take advantage of “teachable moments.” For example, you can debate with your kids whether it’s worth buying a brand-new Nintendo Switch at Target for $300 or searching for a used one on eBay for $100. Young children can also understand the difference between “need” and “want,” a distinction that will help them throughout their entire life of saving and retirement planning.
2. Examine expenses.
Whether considering a retirement safari to Africa or a new phone, it’s important to plan for any financial goal and learn to live within budgets — and that can be a hard lesson to learn. McKown worked with a client who taught this lesson to her kids by encouraging them to pay for half of their iPhones — and all of the apps. By pointing out the cost of games and automatically renewing subscriptions, the parent got the message across about hidden costs.
3. Be honest.
“Teach early the importance of having open conversations about money,” says McKown. “Set real-world scenarios, including any potential inheritance: ‘What will this enable you to do if you have this money?’ ” Parents and grandparents can have an impact on the next generation’s future by being perceptive of, and receptive to, concerns. Is your adult child panicking about saving for their children’s college education along with their own retirement? Talk about it together.
These family discussions can pave the way for younger generations to meet with knowledgeable financial professionals and give them a way to replace fear with care and planning.
4. Plan an annual family summit.
Consider holding family meetings with financial advisors who can share visual, tangible tools that demonstrate investing principles such as the effect of compounding.
“Annual summits are a phenomenal idea, and a great way to present how family budgets work — perhaps 10% of annual income goes toward the home, 5% goes toward food,” says McKown. “The better outlined the family budget, the more productive the family will be.”
If you need to cut back on expenses, now is the time to discuss strategies. In between formal meetings, allow for more natural conversations around financial circumstances, good and bad, such as Mom switching careers or the out-of-pocket costs for Grandpa’s hip replacement.
5. Give thoughtfully.
The annual summit is also a good time to talk about giving back and being appreciative of what you have, says McKown. “Maybe you take what you give to charities and divide it among family members, who then take time to research a potential good cause to receive their portion.” McKown also recommends that, as kids get older and take on summer and part-time jobs, you offer to match what they earn, with the match to be put in a Roth IRA.*
“Talk to them about how they are going to invest the money — mutual funds, stocks versus bonds; what if they were to invest in McDonald’s or Apple?” says McKown. “This helps them relate and start saving in a smart way for the future.”
*NOTE: Investors must have earned income in order to make traditional or Roth IRA contributions.