More on the Financial Tsunami Waiting for Us All

I should have known it. The minute I write about The Bermuda Triangle (Plus One) of Personal Finance, I find a couple more articles on the subject.

For those of you not up-to-speed on what I'm talking about, I'm addressing the intersection of four major financial events that are happening to today's middle-aged adults. These are:

• Saving for retirement
• Caring for aging parents
• Paying for college
• Kids moving back home after graduating college

The first article I want to highlight discussing this issue is one by Suze Orman. She focuses on people who are dealing with both their children moving back home as well as caring for aging parents. Here's her advice for how to handle the first part of this issue:

Regardless of why the kids are back, the absolute worst move you can make is to welcome them without any financial expectations.

Charge rent. Insist that your child set up an automatic payment from their own checking account into a special savings account you set up. That savings account becomes their housing account. You aren't pocketing the money for yourself -- you're helping (OK, forcing) your child to save for a goal: being able to buy their first home, or more likely, at least have enough of a housing fund to cover some of their rental costs.

As for how much to charge, it should be a percentage of their take-home pay -- at least 25 percent.

You should also set a timeline for when they'll move out. Don't wait until you're at the breaking point; you don't want to have this conversation under the cloud of frayed nerves.

I absolutely love this advice. This is what I'll plan to do if our kids ever try to move back into the house. That is if they can get in once we have the locks changed. ;-)

Next, here are some of her thoughts on caring for your parents. Specifically, she suggests you discuss the issue of care with your parents and gives this advice on how to frame the conversation:

"Mom and Dad, I've been working on making sure I have the right documents in place to ensure my family is OK if anything were to happen to me. I'm wondering if you have everything in place, so that when the time comes I can carry out your wishes exactly the way you intend. That's so important to me. I want to make sure I can take care of you, and take care of your estate when the time comes, exactly as you want everything to be handled. And for that to happen, I need to make sure you have the right documents set up in the right way."

Suze then details what these "right documents" are -- so click through on the link above if you'd like more details.

The second article deals with the even more daunting (at least financially) issue of saving for retirement and college at the same time. Every piece I've ever read on this subject has the same advice -- and this one is no different:

I recommend that people avoid trying to do too much and, instead, adopt a realistic saving plan that focuses on the most important goals first and then moving on to secondary ones.

So which goals are most important and which are secondary? Well, ultimately that's a personal decision. But if you look at this issue in terms of what strategy has the best overall chances of securing your family's current and future financial security, I think the following three-step approach makes sense for most people.

• Have an emergency fund.
• Put as much as possible in retirement accounts.
• Once you know you're on track for retirement, you can start to think about other goals, such as saving for a child's education.

Basically, the thought is that only you can provide for your retirement. On the other hand, your kids can get scholarships and other financial aid to go to college, they can borrow money to do so, other family members may help pay for schooling, etc. If you don't save for your retirement, no one else is there to help you out.

I'm in general agreement with this thinking, but I'd add a couple comments:

• My preference is that people would control their spending enough to be able to save for retirement and save a good amount for college. This may mean they need to either control spending or earn more income. (or both!)

• There are tons of ways to save on college costs that can make it much more affordable. You can get financial aid or scholarships, take steps to save 50% on college, save money by studying abroad, or take any number of steps to save on college.

Comments

[Russell Bailyn]

I deal with people concerned about saving money for both retirement and college educations on a regular basis. The advice I give, which I believe many financial planners would give as well, is that saving for retirement should be a priority over paying for expensive educations. The reasons are fairly logical: not only is borrowing money for college fairly easy (and not terribly inexpensive) but your kids have their entire lives to make money and budget out funds for paying back student loans. Plus, federal programs such as Stafford and Perkins will subsidize the interest on loans while you are still a student (grad school included). Or, how about the fact that not everybody needs to go to a private university that costs $35k/year? I went to New York University and to be perfectly honest, I'm not sure I'd value my education at the $140k it cost me and my parents. I think about it every month when $175 is deducted from my checking account for the one year of school I was required to pay. It would be unreasonable for parents to cut their retirement funds short because they are overpaying for an optional private education.

The other two items, kids moving home and caring for aging parents, we see more often lately as the baby boomers really do start retiring. I even read an article about "baby echoes" (i.e. the large population boom we can expect starting after 2010 when the boomer grandchildren start springing up). These items are all related to demographic shifts- along with the whole social security problem.

What I find particularly interesting is the addition of caring for aging parents and kids moving back home into the equation. I'm not sure Suze is right about demanding 25% of take-home pay for kids. Kids moving back home doesn't usually raise living costs that much (except for food/electric and stuff like that). So, to prevent young kids from saving money to teach them a lesson I don't think is such a great idea. Suze knows about the time value of money. How about, rather than requiring a recent grad to pay rent, you demand they contribute $4,000 to a Roth IRA? That... would be teaching a good lesson.