An Added Burden For Boomers: Your Children’s Retirements

The Huffington Post published the following piece on May 25. The idea—parents saving for their children’s retirements—left several readers frustrated. Yet parents have always been leaving bequests for their children; this piece recommends a specific type of bequest—a retirement account or annuity, left at death. I am reprinting it here as this week’s post.

The economy is not clicking along like it should—the recovery of the last few years is slow, halting, and uncertain. The United States now has a large cadre of long-term unemployed, and many of them are in their twenties and early thirties.

These people are obviously not saving for retirement. Many of them are living at home, many are working at low-income jobs, and many are facing student loans and other debts that have immediate priority.

Their parents, mostly Baby Boomers, might help make up this retirement deficit, and now is the time for Boomers to start considering whether they should. If resources are limited, it may well be wiser to help prepare children for retirement than to help with their current bills.

The Numbers

Financial planners know that saving early in a career is crucial to meeting retirement goals. A recent article in the Wall Street Journal illustrated that more than half of a successful 40-year retirement accumulation can come from savings in the first 10 years of working life.

The implications for today’s young people are serious: if they miss the first 10 years of retirement saving, they will need to double their savings rate. Instead of saving, say, 10 percent of their incomes for 40 years, they will need to save 20 percent for the remaining 30 years to make up for missing the first 10 years.

If parents decide to help, how much should they save for a child’s retirement to replace the lost 10 years at the beginning? A reasonable answer is that they should save 10 percent per year of what they believe a normal income would be for their child. If their children expected to be earning about $40,000 per year during their early career, parents should plan to invest $4,000 per year on each child’s behalf.

If young people save 10 percent of a constant real income for 40 years, if the real returns are six percent annually on their investments, they can have a retirement income from their investments that will approximate their working income. If the real returns average five percent annually, they will accumulate enough to provide a retirement income of 75 percent to 80 percent of their working income. These conclusions are based on running the 40-year accumulations through ImmediateAnnuities.com, which offers estimates of lifetime incomes, state by state, for any stipulated retirement accumulation.

Here are general results for a five percent and six percent real, annual, interest rate:

For two real interest rates and each dollar saved annually for 10 years, column three shows the amount accumulated at the end of the 10-year period. Column four shows what that 10-year amount would grow to over 30 more years.

The results can be easily scaled to describe any amount of annual savings by parents. For example, the third row of the table shows the results if parents saved $4,000 (10 percent of an expected $40,000 salary) per year for 10 years at six percent interest. At the end of the 10 years of saving, they would have almost $53,000, and 30 years of additional growth will produce an accumulation of almost $303,000.

Parents can choose among a large variety of investment vehicles, depending on the needs of their particular families. They may set aside money in their own investment or retirement accounts, ear-marking it for their children. Then if the parents needed the money themselves, they could use it. Parents might gift the money annually, asking their children to invest it in a retirement account. And parents and children may elect any asset allocation that fits their risk tolerance and other characteristics.

No one can predict 30 or 40 years of their children’s lives. The point is merely to set some reasonable savings goals to provide some extra help for currently unemployed children when they reach retirement age.

Beyond the Numbers

Setting aside $4,000 per year per child adds up quickly. There are many parents who cannot afford to set large amounts aside for their children. For parents who choose to help, the task may involve sacrificing some of their own retirement plans.

The task may be difficult for family reasons as well. There may be several children that need help, and there may be issues of fairness. Family traditions or beliefs may prompt parents to ask adult children to earn this additional support, which may create considerable tension within the family.

Yet for those families interested in helping their adult children, one of the best ideas may be to let the children deal with their immediate problems as best they can while parents set money aside for their children’s retirements.

4 thoughts on “An Added Burden For Boomers: Your Children’s Retirements

  1. Warren,
    A bequest is when one puts aside $4000 a year for 40 years ,earning a return of 6% per annum, in order to have $300,000 to leave to the kids. Saving for the childrens’ retirement is saving 4000 a year for 40 years,earning a return of 6% per annum. So what did you say was the difference and why is it important? 🙂 A rose by any other name would smell as sweet.

    • No Ghassan, a bequest is personal property (money, stocks, bonds, annuities, jewelry) left at death to an heir. It is not $4,000 of savings for 40 years. The difference is important because until you die you can redirect the use of your savings to other purposes (unless you make irrevocable gifts or place the money in other irrevocable arrangements like a trust, some annuities, or other). If assets are left to heirs in your will, they become bequests when you die.

      In the post, the example was not $4,000 for 40 years yielding $303 thousand. It was $4,000 saving per year for 10 years; then the accumulated value was left invested for an additional 30 years, giving about $303 thousand. If parents saved and invested $4,000 per year for 40 years at six percent, the accumulated value would be about $619 thousand.

      There are many ways to effect this idea, but the post implicitly assumes that until death, the parent-Boomer retains control of the investments. That is what I would recommend in most cases, as fortunes can change. The child you’re worried about may make a fortune elsewhere and not need your savings, while another relative (or yourself) may grow to need it.

      I’ve edited the post a little to help make these points more clear.

      Thanks,
      Warren

      Thanks.

  2. I am curious as to why some of the readers were left frustrated. Is it fear of giving away too much, maybe making the child unappreciative? Maybe the fact that lots of folks are under such financial stress that adding another big repeating payment is out of the question? Just curious.

    I enjoyed the points you made here. I think it is important in the brave new world to discuss the particulars of something that is often not talked about. Most parents do want to leave something for the children and planning for it makes more since to me than just giving them the post mortem residual. Getting in early and letting the extended time horizon be your friend is a smart move for folks that want to go the planned route. -Kent

    • To read the comments themselves, check the Huffington Post Article (http://www.huffingtonpost.com/warren-flick/kids-retirement-parents-help-kids-with-their-retirement_b_1519114.html)

      If you read them, you’ll see they are not always easy to interpret; but I’ll try to respond:

      Some readers objected to using interest rates of 5% or 6%—they are much too high. I should have used the term “investment returns,” which might have been clearer. Given our history, such long-term real investment returns are reasonable expectations, in my view. On pessimistic days, I lean toward 5%, maybe even 4.5% as a long-term, real return. On optimistic days, I lean toward 6%.

      Others objected to the basic idea. Parents shouldn’t worry about such stuff; children should stand on their own. One reader said he “would feel totally guilty for even thinking about accepting that. Give me a break.” But I wonder if that reader would renounce a bequest of $100,000 from his parents.

      Finally, one reader indicated that while placing such a burden on Boomer-parents is depressing, it is an indication of how bad things have become.

      Many of us in the 50+ cohort grew up with the idea that parent responsibility ended once the kids turned 21 or graduated from college. After that, they should be on their own. That idea is well represented in animal populations, of course, and it is a natural expectation in an open and expanding economy like the United States of the 20th century. In the 1960s or 1970s young people found jobs more easily than now, and if they elected not to save for retirement, then they had only themselves to blame.

      But many observers believe things are changing. Entitlement burdens are expanding; an entitlement mentality is growing firmer among Americans; employers are increasingly burdened with providing benefits for employees, which raises the costs of each job; other restrictions and regulations of business are growing; real estate values have imploded; federal taxes are poised for a significant increase; federal spending is growing strongly. Also, other regions of the world are becoming more attractive to business growth. It seems to me that we face higher odds of slower growth, particularly employment growth, in the next decade or more.

      I know several young people (and some in their 50s) who can’t find jobs, who had jobs and lost them, and who have completely drained their retirement accounts. There are millions of people in their 30s and beyond who have nothing saved for retirement.

      A bequest focusing on this need may well prove to be a life saver for many Americans.

      Thanks for your comment, Kent.

      Warren

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