I recently spoke at Grace Church in Lititz, PA about the importance of teaching your children how to handle money. Learning to live below your means, maintaining an emergency fund, saving and investing regularly, and operating your household on a budget are the keys to financial success. To underscore the importance of financial education, a recent survey by the Employees Benefit Research Institute found 28 percent of Americans — the most since the annual survey began 23 years ago — say they have no confidence in their ability to afford a comfortable retirement. Worse yet, the survey showed that an alarming number of Americans expect to have to work well past retirement age.
The need for financial planning and financial education has never been greater. I shared some of the following financial statistics during my presentation.
- 59% of credit card holders carry a balance from month to month.
- 68% of American households live paycheck to paycheck.
- The median household net worth of Americans is $57,000.
- One third of retirees live on Social Security alone (average monthly social security $1,230).
The National Association of Personal Financial Advisors (NAPFA) published the results of a survey about the importance of financial planning that may explain my statistics:
- 56% of U.S. adults lack a budget (68% live paycheck to paycheck).
- 40% of U.S. adults were saving less in 2012 than in 2011 (they use their credit cards for emergencies).
- 39% of U.S. adults have no non-retirement savings (1/3 retire with Social Security alone).
- In 1991 only 11% of American workers expected to retire after age 65. In 2012 that percentage had risen to 37%.
These are just a few statistics highlighting the poor state of the finances of many Americans. You can help your children and grandchildren avoid some of these pitfalls by making sure they learn the basics of handling money. Encourage them to take a course on financial basics. Many courses are offered by non-profits for free or for a small fee to cover materials. If you have a financial adviser you trust, consider paying them to work with your adult children or grandchildren to put them on the path to prudent money management.
Financial planning is not a cure-all, but it can help. The planning process forces a person to articulate their life goals and to think long term. Keeping long term goals in mind helps resist impulse buying and overspending which can lead to a debt spiral. Carrying credit card balances month after month with double digit interest rates is a quick way to financial ruin. A financial adviser will help hold you accountable for the goals you have set and point out when overspending puts your timetable in jeopardy.
You can help put your children and/or grandchildren on the path to a secure retirement by making a Roth IRA contribution for them as soon as they have earned income. The maximum contribution in 2013 is $5,500 or 100% of earned income, whichever is less. You could make a Roth contribution based on the earnings they have from a summer job. Total up their W2 statements at tax time and make the Roth contribution for the total amount up to $5,500.
Let’s assume you make a $5,500 contribution to a Roth for your child every year starting at age 16 until they are 25. If no other contributions are made and the account grows at an average of 8%, their Roth IRA would grow to $1,200,000 by the time they are age 60. Not bad for a $55,000 investment!
The earnings will be tax free when withdrawn and there is no estate tax since each contribution was a completed gift. Another plus is the Roth is a retirement account and doesn’t count as an asset for determining eligibility for financial aid. You could continue to fund the Roth for them while they are going to college. Adult children living on their own may also qualify for The Retirement Savings Contribution Credit, known as the Saver’s Credit based on your gift to their Roth IRA. This credit may allow them to get a tax credit for up to half of what you contribute to their Roth IRA. Up to $2,000 of your contribution is eligible for the credit. They cannot be claimed as a dependent on anyone else’s tax return and their income must be within specific guidelines to qualify.
Help your children and grandchildren learn to handle money properly and put them on the path to a secure financial future.
- Most Americans overspend during their working lives and have little saved for retirement.
- Basic course on budgeting can help people learn to save regularly which is one of the keys to financial success.
- Funding a Roth IRA for your child can put them on the path to a secure retirement.