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Instead of looking to the end of their careers, millennials are saving for incremental goals. Experts say this could be an issue down the line.
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Dear Pete: My wife and I have two adult children. No. 1 has just begun her career in the medical field where she earns $27/hr. We have paid for her undergraduate education and part of her graduate school education. She is still on our health insurance, car insurance, and cell-phone plan. Her student loans total $47,000. She pays $525 rent plus utilities and buys her own groceries. Child No. 2 is in his third year of college, but in his first year of pharmacy school. We pay his rent and some groceries. He has been getting student loans for the rest.
Our household income is around $80,000, and we have around $500,000 in 401(k) retirement funds. Our house is paid for. I am 57 and my wife is 53. With some opportunity for overtime I have made around $115,000 this year plus my wife’s $21,000. Overtime is not always available. My question is should we be helping more or less and with 11% going into 401(k) and 3% going into Roth Ira will we have enough for retirement? I plan on working until I am 67-68. Please give me some advice. I feel as I should help more but don’t want to shortchange my retirement. — Brent, Trenton, N.J.
Based on your current retirement assets, your $80,000 household income, and the uncertainty of overtime opportunities, you’re projected to have approximately $1.16 million at age 67 (based on 7% average rate of return). This is the part of my column which leaves most readers seeing what they want to see. Some folks will be thrilled by your future millionaire status, while others will note how poorly $1.16 million will do in attempts to replace your work income in retirement.
As it stands now, you’ll have roughly $2,300/month in inflation-adjusted after-tax income at retirement from your retirement funds. This obviously doesn’t include any money you’ll receive from Social Security or monthly pension payments, if you have any. I can’t say definitively whether or not this will be enough money for you in retirement, but I’m pretty confident in saying I don’t think you’d have a successful retirement outcome on any less.
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Better safe than sorry — you need the money more than your adult children do.
Let’s take a look at the other side of the equation — your adult children’s need for assistance. Your daughter is on pace to earn over $56,000 in the next 12 months. She pays a small amount of rent, has zero health care and car insurance expenses, and she doesn’t pay her mobile phone bill. Her student loans can easily be vanquished within 10 years, given her income and low expenses. She needs your further assistance like I need another hair to fall out of my head.
Upon completing pharmacy school, your son’s starting salary will be around $110,000, if he’s around the median starting income for first-year pharmacists. He will also be able to easily crush his student loans within 10 years of graduation. Feel free to offer small support here and there until he graduates, but after that, write him a prescription for independence.
At some point, financially assisting adult children who don’t need support, crosses-over to a very ugly place — enablement. Not only do your adult children need a fighting chance, which they have, but they need financial survival skills, which I don’t know whether or not they have. Your adult children need to learn to make really difficult financial decisions, if they haven’t already. You’re the only person who knows if they can or cannot. The only way you’re going to find out if they can truly make it without your financial support is to stop supporting them financially.
Millennials, this is how you can fix your YOLO financial mind-set.
If you want to continue your current level of support, it won’t necessarily negatively impact your retirement. But I wouldn’t extend them any further level of support. They don’t need it, it could actually hurt them, and you need the money more. Instead, crank-up your support for your retirement.
Your biggest risk is financial inefficiency during your big years (lots of overtime). If you waste the opportunity to store even more money away for retirement, you risk increasing your lifestyle and creating more dependency on an temporarily high income. Then when small years (not much overtime) arrive, you’re too dependent on a higher level of income.
If you feel a big year on the horizon, turn the knob higher on your 401(k) contributions. Get that extra money out of your face, and away for the future. And once your support of your adult children wanes completely, crank your 401(k) contributions up even further. There’s no coasting to the finish line here. You need to finish strong.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com