Some Thoughts on Children and Planning for the Future

Right now, Sarah and I are planning to have early retirement fully on the table approximately two years after our youngest child enters college. At that time, assuming that our older children take five years or less to earn a bachelors degree, they’ll be fully on their own.

That’s our assumption, anyway. Of course, our whole assumption regarding our children and their lack of financial reliance on us is predicated on our parenting style, which is based on our own experiences with college and leaving the nest.

Let’s rewind to the mid-1990s, when Sarah and I graduated from high school. Both of us were raised to be fairly self-reliant and when we went to college, the idea was that we were training for a career and this was a period where we were separating from our parents and that we would not be moving back home after college. It was expected that we were going to sink or swim on our own, and our parents believed (and rightfully so) that they had taught us the skills to do just that.

Now the scenario is reversed and we’re the parents. Our goal? We’re trying to teach our children the skills they need to sink or swim on their own. Even now, with our children in primary school, we’re encouraging as much independence as we can. We’re encouraging savings skills. We’re teaching them household tasks. We’re strongly encouraging self-determination and open-ended projects. We’re strongly encouraging individual responsibility.

Are we perfect at these things? No. But those are the principles we’re acting on as parents.

The real question, though, is this: Is it a safe assumption to assume that our plan as parents – to have our children be fully independent after college – will actually happen? Should we prepare financially for the possibility that it won’t be?

Basically, I see four potential outcomes: whether or not our children are independent, and whether or not we provide financial outpatient care.

Scenario 1: They’re Independent, We Help Them Get Started

This is a situation where my children follow an independent track during and after college but we still provide them with money in order to make things easier for them.

This scenario simply won’t happen. My parents stopped providing significant financial support when I left for college, and eliminated what little help they still gave after a few years of college. It was easy for them because I had a giant independent streak, but it was also the right move for them. If my children choose a path of independence, you better believe I’m going to let them do it and take off the financial training wheels as early as possible.

Scenario 2: They’re Not Independent, We Help Them Get Started

In this scenario, they’re not able to make it independently after college, so we give them a lot of help. Perhaps we allow them to move back home, or maybe we provide direct financial aid so that they can have an apartment while they search for work.

This is the situation I worry about. If my children aren’t able to spread their wings and fly after college, will I end up helping them in this way? My ideals say that I wouldn’t, but on the other hand the thought of my children struggling to eat or keep a roof over their heads turns my stomach.

Scenario 3: They’re Independent, We Don’t Help Them Get Started

In this scenario, the children graduate from high school and follow their own path into their adult life without any help from us. They struggle, as we all do, but they manage to make it on their own without help from us.

This is my ideal scenario. They’re independent, they don’t need our help, and we wouldn’t give it anyway. This is the scenario we’re aiming for with our savings goals and our parenting strategies.

Scenario 4: They’re Not Independent, We Don’t Help Them Get Started

In this scenario, our children struggle mightily after graduating from high school. Perhaps a personal difficulty gets in the way of their goals. Maybe they find themselves failing to graduate or completely unable to find a job. Whatever the case may be, in this scenario, we simply don’t help them out. We let them struggle on their own, even if they sink.

This is the most difficult scenario, personally. Could I actually do this? Could I not offer aid to my children if they were really hurting?

graduation at Johh Hopkins
How do you plan for the possibility that your adult child may need financial help? Photo: Sakeeb Sabakka

Scenarios and Saving for the Future

Since the first scenario simply won’t happen, what we’re looking at are scenarios two, three, and four. Scenario three is the ideal one – it’s the one we’re shooting for.

The real question is what exactly Sarah and I will do if our children struggle. Will we help them and, if so, how much? The outcome of that question has a significant impact on our savings for the future.

Let’s say, for instance, we assume that we will have to help our children in the future. They move back in, which requires us to stay in a larger house. They eat our food, which drastically increases our food budget. We even slip them a little spending money and help them out with things like rides to interviews and so on.

That’s going to cost a significant amount of money. Our monthly budget in our fifties is going to be a lot higher than if we do nothing.

The reality is that this outcome – having to financially support our kids in adulthood, even partially – would simply postpone our dreams of retiring early. If we expect to support our children at that point, we simply aren’t going to be able to retire nearly as early as we want to because our annual cost of living will be too high. Our target number that we need to be able to retire would go up substantially because our annual cost of living would go up substantially and that means it will simply take longer to get there.

Great, so what’s the problem today?

The problem today is figuring out an investment strategy that manages to make early retirement possible if things turn out that way but won’t leave investment returns on the table if we find ourselves helping our kids in adulthood.

Let’s start by looking at our investment plan for early retirement. Our plan is to have aggressive investments up until the ten year mark before we think we might retire early, then start switching our contributions to more conservative things. We don’t want everything to be conservative, mind you, but we want a more balanced approach than what we’re doing now.

Now, what happens if one or more of our children winds up receiving some form of financial support from us? As I mentioned earlier, our annual budget goes up accordingly, which means that we won’t have enough money at that point when we originally intended to retire (when our youngest son is partway through college). Because of that, we’ll have to wait until later to retire, not only because we’re not at our target number yet, but also because we’re not able to save as much per year as we otherwise would.

Our target date for early retirement slips closer and closer to the date of what would be our traditional retirement, in other words.

The problem is clear. If we save as though we’re going to retire very early, that means we start moving into conservative investments earlier. If we then are unable to retire early, our investments spent years in less aggressive investments, meaning that our investment choices are also holding us back. We need to be pretty aggressive up until fairly close to retirement, and moving back our retirement date leaves money on the table.

On the other hand, if we save as though we’re going to have to support our kids and then we don’t have to, we’re going to be in aggressive investments right up until close to the day when we could retire early. We’ll either have to live with aggressive investments in retirement or deal with potential tax consequences from shifting into more conservative investments (this is somewhat mitigated by retirement accounts, but not entirely).

In other words, if we guess wrong, we’re leaving money on the table at best and delaying our retirement by years at worst.

So, what’s our game plan, then?

We’ve decided to plan under the assumption that we’ll probably have to help at least one child. What that means is that we’re going to stay really aggressive with our retirement savings until it’s really clear to us that our children will be independent and we can actually retire early without worrying about supporting them. At that point, if it comes, we’ll downshift quickly.

This is a great example of how “real life” mashes up with nuts-and-bolts financial decisions. Our children’s future is heavily tied with our own retirement plans and how we save for them, and knowing that and considering it has changed how we’re going to save and plan for retirement. We’re going to assume an outcome we might not prefer and be joyous if a better outcome occurs. Sure, we’re playing it safe, but we find it far better to do things this way than to bet on retiring early and find ourselves in a tricky family spot.

Trent Hamm

Founder & Columnist

Trent Hamm founded The Simple Dollar in 2006 and still writes a daily column on personal finance. He’s the author of three books published by Simon & Schuster and Financial Times Press, has contributed to Business Insider, US News & World Report, Yahoo Finance, and Lifehacker, and his financial advice has been featured in The New York Times, TIME, Forbes, The Guardian, and elsewhere.