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Are Your Children Your Retirement Plan?


Raising a child, especially in the current US economy is an expensive affair. Thousands go into education, healthcare, and fulfilling basic day-to-day needs. Hence, a lot of times, couples don’t save enough for their retirement and end up depending on their children to finance their retirement plans. But is that really a good idea? Absolutely not!

Not only is it unfair to your kids, but it’s also risky to give up your financial freedom and rely on someone else for every dollar you need. So how exactly should you be planning your retirement? Read till the end to find out.

6 reasons why your children shouldn’t be your retirement plan

While it’s common in some cultures to rely on your children to fund your retirement, it’s a bad move from a financial point of view. Here are six reasons why you shouldn’t rely on your lids for retirement:

1. They might not always be there

While no parent wants to imagine their children dying before them, there’s always a possibility that you cannot ignore. God forbid, but if something like this were to happen, you’ll not only lose your child but also your means of survival.

Just imagine, if you were to die at 60, your kids could still go on without you. They would be done with college by then and be happily settled in a stable career. But if you’re left alone at 60 with no retirement fund, you can neither join back the workforce nor start a business of your own (since you don’t have the capital). Frankly, it would be over for you.

2. You might miss out on a lot

When you depend on someone to fund every part of your life, they only take care of your needs, not your wants or dreams. For instance, your child might be happy to put a roof over your head and provide you with warm meals and other basic necessities. But they surely can’t fund your dream world tour with your spouse or the car you’ve always wanted.

For most people, retirement is a way to get back everything they missed during their younger days when they were busy hustling and grinding to raise a family. But the only way to get back the dreams you left in your youth is through sufficient funds. Otherwise, all those years of hard work will yield nothing but a boring and unfulfilling retired life.

3. It can lead to internal conflict

Setting aside family values and emotions, raising a family on a single income is tough. Prices of everything, be it basic daily needs or luxuries such as properties are at an all-time high. In a situation like this, it can be very hard for your kids to run their families as well as look after you and your spouse. And whether you like it or not, it might lead to internal conflict.

So instead of risking your relationship with your children and adding to their already overflowing plate of responsibilities, taking care of your own finances, even post-retirement, is a smart move. They’ll be more than welcome to contribute if they want, but imposing your financial needs on them will never work out.

4. You’ll be dependent

For someone who has worked their entire life and paid all their bills with their hard-earned money, it can be a little hard to give up all your freedom and rely on someone else, even if that’s your own child.

They might not mind supporting you, but they might require accountability. Think about it, after being financially independent for decades, can you really go back to telling someone why you need $100 or how you intend to spend it?

Not to mention, your kids might not be thrilled with the idea of supporting you throughout. After all, there have been countless instances where old parents have been abandoned by children.

Sure, you might not think that your kids will do that to you. But do you really want to take that risk? Remember, it’s hard to start over with a new career at 60, especially if you don’t have enough funds.

5. It’ll hinder their financial growth

Just like we mentioned before, raising a family on a single income in this economy is challenging. On top of that, if they have to take care of you and your spouse, too, it’ll be impossible for them to grow financially.

All they make at work will directly go into rent, school fees, food, and other basic necessities for the family. By the time all the bills are paid, they won’t have enough left to save, let alone invest.

In simple terms, by expecting your child to pay for your lifestyle post-retirement, you’ll be capping their growth. They might be able to pay for their needs but achieving dreams and luxuries will be next to impossible.

6. Increased risk of poverty

Life might not have seemed so hard when you had your own money to look after your partner and home while all that your kids had to worry about was paying their own bills. But the moment you lose your income and the burden of all the bills falls on one paycheck, you’ll notice that slipping under the poverty line is easier than it looks.

It’s quite simple if one paycheck that was earlier used only to cover 1 or 2 people is now providing for four people, your standard of living and purchasing power will have to take a hit. In this case, your family will be the only major crisis away from falling into quicksand-like poverty.

Seniors and Children Living in Poverty

Avoid these 3 mistakes to childproof your retirement plan

Let’s say you have planned the perfect retirement plan for you and your spouse. But does that guarantee stability? Not if you have dependent children. Here are three pitfalls to look for when planning for the future:

1. Plan your retirement saving as you plan your child’s college fund

The biggest financial contribution any parent has to make to their child is the college fund. Just like healthcare, education too is extremely costly in the USA.

So for starters, if you don’t have the fund to provide for both your child’s college and your retirement, prioritize the latter. You can always take an education loan for your child’s future, but you cannot request a loan for your retirement.

Also, try to help your kids earn more credit points, choose the right college, and land scholarships so that they graduate with lesser debt. Your kids might not like the pressure of paying off debt from the first day of their work life, but it’s still a better choice than depending on them for every small need for the rest of your lives.

2. Teach your kids to be financially independent

The sooner your kids will be financially independent, the more you can save for your retirement. Although many students manage to land a job after high school or college, having a job isn’t the same as being financially independent. It’s not uncommon to see adult children with jobs relying on their parents for additional support.

So from a very young age, teach your children to budget. The best way to do so is by providing them with a monthly allowance to manage their personal needs.

If your kid has never had any money of their own, they’ll be tempted to spend their money the moment they get a paycheck. However, if your kids know the value of money, how to manage all bills within a given limit, and the essence of saving, you won’t have to deal with reckless adult children who continue to rely on you for their basic needs.

3. Set limits on financial support for adult children

As a parent, it’s naturally difficult for you to see your kids in distress. But it’s important to keep your emotions aside and cap how much financial support you’re willing to provide to your adult children.

Life is full of ups and downs. They might hit a rough patch and lose their job, get divorced, or move back to your house. However, it would be unwise to spend your entire retirement fund on helping them get back on their feet because once they do, they’ll go on with their lives while you’ll be stuck penniless in your 70s.

Also, if you help your kids every time they’re in trouble, they’ll never learn how to manage their crises on their own.

So for the benefit of both parties, it’s best to limit your spending on adult children. Let them figure out their lives on their own so that you can have enough to live comfortably with your spouse till the very last day.

Best retirement plans & schemes to secure your future

Not everyone in the USA has access to employer-sponsored retirement plans. And even if you do, it might not be enough for the life you’re planning ahead. In that case, here are some long-term retirement plans for you and your spouse to secure your future.

1. Traditional IRA

The easiest retirement plan is to go through a traditional IRA. This plan works for anyone who has a taxable income but doesn’t have an employer-provided pension. Under the IRA, you can choose where to invest your money. It could be mutual funds, ETFs, and other assets. The amount you pay to the IRA is tax-deductible, and your income from those investments is also tax-free.

However, once you start withdrawing your funds after the age of 59.5, your earnings will be taxed just like regular income.

2. Spousal IRA

The spousal IRA isn’t technically an individual type of IRA. It’s more like a way to maximize your retirement savings. This plan is perfect for couples where one partner is either unemployed or makes significantly less than the other.

Under this plan, the working partner can contribute to the IRA account of the non-working partner. Since the fundamental rule of IRA requires the person to have an income in order to contribute, a spousal IRA is a perfect solution for dependent partners.

3. Roth IRA

Roth IRA offers the perfect retirement plan for those families that don’t have a high annual household income. Unlike a traditional IRA, the amount you deposit here won’t be tax-deductible, but once you retire and finally start utilizing the fund, you won’t have to pay a single penny in tax.

On top of that, Roth IRA can also double up as your emergency fund because it lets you withdraw funds before retirement without a penalty.

4. Traditional 401(k)

This plan will work only if an employer provides a 401(k) account to you. Under this scheme, you’ll be putting in a part of your pre-tax income all the way until retirement. Since these investments are made on a tax-deferred basis, you won’t be taxed for the returns on your investment until you start withdrawing from it.

Some employers also encourage their employees to invest in 401(k) accounts by matching their total investment up to a certain percentage of their salary.

5. Roth 401(k)

A lot of employers offer Roth 401(k) along with traditional 401(k). The only difference is that for a Roth 401(k) account, the income comes from your after-tax salary (unlike a pre-tax salary, as in the case of traditional 401(k) accounts).

In addition to that, the income you make from those investments is not taxed, even when you start withdrawing them post-retirement.

The trick to picking the right plan is to check in which scenario you’ll be paying lower taxes. If your income tax is lower now, but all these investments can land you in a higher tax bracket, go for the Roth 401(k) plan

6. Solo 401(k)

This is the perfect retirement plan for self-employed individuals. Under this scheme, you contribute to your 401(k) account both as an employer and an employee, enabling you to maximize your retirement savings.

As an employer, you can contribute up to 25% of your total compensation, and as an employee, you can contribute up to $66,000 or $73,500 (if you’re over 50) to the fund. Just make sure that the total contribution doesn’t exceed $66,000 or $73,500 if you’re over 50.

Conclusion

There’s no doubt that you love your children, and they love you too. But it’s best to let practicality take the lead when it comes to finances. The number one rule of finance management is to prepare for the future.

A part of the money you earn today should go into securing the days you don’t have an income, and relying on your kids is certainly not the best way to go about it.

We hope our guide was able to show you the right way to a happy and secure retirement. Feel free to check out more such guides on our website to know all there is to know about managing finances for and post retirement.

The post Are Your Children Your Retirement Plan? appeared first on Due.



This story originally appeared on Entrepreneur

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