Gifting Your Kids a Financial Plan

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According to the U.S. Census Bureau, there are nearly 22 million “doubled-up” households in the United States—that is, households with an extra adult who is not a student or partner. That’s two million more households than in 2007. More than half of this increase came from so-called “boomerang” children between the ages of 25 to 34 who have moved back in to live with mom and dad. Even if children don’t move back in with their parents, almost 69% of U.S. households provide some level of financial support to adult children.

To be sure, the current economy is partly to blame, but this trend predates the most recent economic woes. Teaching your kids how to take control of their own financial futures is also a large piece of the puzzle, and, you can make that happen—even if you don’t quite know yourself.

Break Bad Habits

Help your kids avoid bad habits that can last a lifetime. According to a recent report by the financial services think tank, LIMRA, almost 49% of Americans aren’t saving at all for retirement. Apparently, this behavior gets an early start: 56% of Americans between the ages of 18 and 34 are not saving for retirement, despite stating retirement as their most common financial goal. Almost half of Generation X and Y Americans also feel overwhelmed by debt. Responding to a 2009 report showing that young adults today had a much lower financial literacy than previous generations, Treasury Secretary Tim Geithner stressed that the nation “must do a better job making sure our students graduate from high school with a better understanding of basic economics, basic finance, and the benefits and risks associated with debt.”

Get an Early Start

Having your kids get an early start on saving can pay them big dividends down the road. In order to accumulate a million dollars by the time they’re in their 60s, they would have to start saving at least $4000 to $5000 per year starting in their 20s. If they wait just a decade to start saving, they will have to nearly double the amount they put away in order to reach that million. A million dollars may sound like a lot of money, but it buys less than you might think these days. For example, suppose that a 65-year-old male, with a 62-year-old spouse invests one million dollars into a lifetime annuity today that produces monthly income until they both die. At current market prices, they will receive less than $5,000 per month, an amount that does not increase with inflation over time. Thus, your kids will likely need to save a larger amount of money than you did. By the time they hit retirement age, the Social Security trust fund may be depleted [PDF] and only able to fund around two-thirds to three-quarters of current-law benefits.

Get a Job

Better debt management can also help your kids get a better job. According to the Society for Human Resource Management, almost half of employers now incorporate a job applicant’s credit scores as part of the hiring process. So, poor debt management can lead to a double whammy: a lot of debt without the means to pay it off. Improving your kids’ credit scores can often be the tip factor that distinguishes your child’s resume from the mass of other applicants being combed over for the same position.

The Bottom Line

Your kids definitely want help. Indeed, according to the LIMRA report, about 40% of Generation X and Y consumers stated an increased need for professional financial advice—and this percentage is likely to increase as they get older. At the same time, a majority of individuals in these generations feel that they can’t afford the help. The gift of a financial plan can help your kids help themselves. And, if they’re better prepared, they might be in a better position to help you someday. As Benjamin Franklin put it, “an investment in knowledge always pays the best interest.”

About the Author: Kent Smetters is The Boettner Chair Professor at The Wharton School at The University of Pennsylvania. He is also co-founder of Veritat Advisors, a mission-driven firm that makes objective and personalized financial planning affordable for all households.

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