How to Make a Retirement Plan with Your Family in Mind
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As they get closer to retirement age, Gen Xers find themselves with more financial responsibilities than previous generations. Many are balancing saving for retirement with the increasing costs of raising a family and the hefty price of caring for their aging parents.
In fact, AARP has found that 20% of Gen Xers believe they’ll never be able to retire at all—let alone retire while caring for their parents and their kids. And if it’s this bad for Gen Xers, it’s likely not going to get much better for Millennials and Gen Zers.
All of this leads to a set of circumstances that are less than ideal for anyone planning for retirement. If you’re starting to plan for retirement and have family that could depend on you financially at some point, there are a few things that you can start doing now to offset the effects of the staggering retirement savings crisis.
Related Article: 4 Shocking Facts about Gen X’s Finances
Saving for your kids’ college tuition
If you envision your kids going to college, you’ve likely been told to save as much as possible for their tuition to keep up with increasing tuition rates. But in the current economic climate, with retirement looking like a near-impossible dream to many, saving money for your kids’ college plans while ensuring the longevity of your own wealth is much easier said than done.
As a parent planning for retirement, if you find yourself torn between putting money aside for retirement versus saving for your kids’ education, it’s important to know what options are available to you to make the most of your savings.
Pros and cons of 529 college plans
There are specific tax-deferred college savings funds called 529 plans that allow you to grow your college savings over time and take tax-free withdrawals for qualified education-related expenses like tuition, room and board, fees, and so on.
These plans allow you to pay current tuition rates for future tuition expenses—meaning you’re essentially paying for college at a lower rate by using your 529 funds.
However, a huge con is that you have to pay taxes on the fund if you make non-education related withdrawals, so if your child decides not to go to college, you (and your child) will end up losing a lot of those savings and investment earnings to taxes.
In short, these plans definitely have their advantages, but as with any type of investment account, there are risks (and taxes!) involved.
Using IRAs to save for college
Remember: while your kids can take out loans for college, you can’t take out loans to retire.
Of course, if you can help it, you’d rather not saddle your kids with college debt, and 529 plans are a great way to avoid that at least partially. But if you have to make the choice, you may find that saving for retirement over saving for your kids’ tuition allows you more flexibility.
If you’re not sure whether your kids will go to college or are struggling to save for both college and retirement, putting your money into an individual retirement account (IRA) could be a solution. That’s because your IRA funds can be withdrawn to pay for your kids’ college expenses—and if you have a Roth IRA specifically, you won’t have to pay taxes on distributions (even for investment income!).
It's worth considering, too, that money set aside in retirement funds is not considered an asset when applying for financial aid for colleges using FAFSA—meaning you won’t be required to pay more for college out of pocket because of whatever amount of money is in your IRA.
Basically, if you know the loopholes, you can get creative with your kids’ college savings options in ways that benefit you, too!
Supporting your parents while saving for retirement
Unfortunately, many Americans in their retirement years didn’t count on not being able to rely on Social Security to live during retirement, and pensions are practically a thing of the past for most. That leaves a lot of seniors at risk of running out of money during retirement. For many, their kids will have to pick up the slack—but many adult children don’t have the funds.
In fact, a 2022 study from American Advisors Group found that 55% of Gen Xers aren’t financially prepared to care for their aging parents during a time of need.
So how can you help your parents when you’re planning your own retirement?
Establish expectations and boundaries
The best way to start planning is to have a conversation.
How much money do your parents have available to them? Do your parents expect you to help them pay for both essentials and nonessentials? Will they stay with you or a sibling, live independently, or move into an assisted living facility—and who will pay for what?
Reversing the parent-child roles might seem awkward at first; it’s difficult to adjust to establishing expectations and boundaries for a parent’s finances, and it may require a lot of effort just to broach the conversation.
But if, for instance, you’re dealing with a parent who has a problem with overspending, it’s best to start establishing early on exactly what expenses you’re willing and able to support—and when it’s time to start enforcing the boundaries, make sure you actually stick to them!
Look into government assistance programs