Among the findings of the recent NerdWallet new
graduate retirement study was this: Young adults who live at home for two
years after college graduation can shave as many as five years off their
expected retirement age. Want to help your kids have a choice in their
post-graduation lifestyle? Lay a foundation so they're prepared to be
financially independent. That means having tough conversations about financial
priorities, the potential costs of college and the importance of saving for
retirement. Here are five lessons you need to teach your kids before, during
and after college to help them launch.
Start by limiting
student debt
A good rule of thumb: Hold total student loan borrowing to
50% to 100% of you expected first-year salary. To do that, college students
should get a job rather than borrow to cover lifestyle expenses. Exhaust
scholarship and grant opportunities before taking out loans. And the kicker: Be
careful with school choice, which has the biggest impact on debt levels. And as
your children get ready to graduate, make sure they educate themselves on all
their student loan repayment options, rather than let the government pick
the default plan.
Saving for retirement
requires a plan
Plenty of online tools and advice will walk your kids
through figuring out how much to save for retirement. After that, you're
ready to talk savings vehicles. If a 401(k) with matching dollars is an option,
this is a short conversation: That match is free money, so the 401(k) should be
used first. And payroll deductions for a 401(k) are a hassle-free way to get
into the habit of saving. Otherwise, the best choice is often a Roth IRA.
And here's some good news: A Roth IRA can be opened while in college
(or, for the really ambitious, high school) as long as the student is earning
income.
Your peak wage growth
years are coming right up
We often assume that the older we get, the more our salaries
will increase. It's a good excuse to put off saving. But a recent analysis
of Social Security Administration data by the New York Fed found
that the bulk of earnings growth happens between ages 25 and 35. How handy,
then, that those early years are also when savers can make the most of compound
interest, which has a huge impact on a retirement account balance. Those who
manage to bank their salary increases when they're young will have a much
easier time building retirement wealth.
If you don't want to
spend less, you have to earn more
In this "gig" economy, there's no excuse not to
have a side job if full-time work doesn't pay the bills. The options are
virtually unlimited, but you may need to nudge your college grads in the right
direction. A few suggestions: Become a ride-share driver. Rent extra space in
your apartment on Airbnb. Use Rover or DogVacay to find
pet-sitting clients, or Care.com to find babysitting ones. Rent out your
belongings on Zilok, sign up to take on small jobs through TaskRabbit,
become a freelance virtual assistant on Upwork, or write or edit content
for Scripted. Part of this lesson involves some gentle reminders that this
extra income should be used wisely: The idea isn't to pad an entertainment
budget; it's to fund an IRA.
Financial basics will
keep you on track
Aside from increasing income as noted above, two other
things can significantly improve financial security: a budget and an emergency
fund. Maintaining the former will make it easier to fund the latter, as well as
to find money to save for retirement. These days, a budget requires little
effort, says Stephen Hart, a financial planner in Plano, Texas.
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