Updated on 02.27.10

Parental Responsibility and Retirement Savings

Trent Hamm

As I discussed yesterday in a pair of articles (this one and this one), I dream of a future where my children and I are completely financially independent from one another. I’m not dependent on them, nor are they dependent on me.

The real question that both articles strive to answer, though, is where should I put my money to ensure the best possible outcome for both me and my children? Retirement savings? College savings? Splitting it up?

In my eyes, the issue really comes down to the job every parent is charged with: raising a functional, critically thinking, independent child. If you are truly able to succeed in this regard throughout their childhood, you’re going to raise a child that doesn’t really need your help at all to succeed in the world.

In other words, if you take the time to really focus on parenting your kids in a way that makes them functionally independent and critically thinking adults, you don’t need to save for their education. They’ll be able to make their own way in the world without your financial support. Thus, you can channel almost all of your long-term savings into retirement savings so that you’re not a burden to them in whatever they wind up doing in life.

How do you do that?

Over the last five years, I’ve read a pile of books on the psychological needs of children and young adults, everything from Mindset and Born to Buy to The Read-Aloud Handbook and Raising Financially Fit Kids. I’ve come up with three basic conclusions.

First of all, praise children on their hard work, not their natural gifts. Focus on when they improve their results, not on when they simply succeed because of their talents.

Second, give them room to explore independently. Don’t hover. Don’t be paranoid about kidnapping. Send them out in the yard to explore things on their own, then when they’re done, ask them about it. The more independent exploration they do, the more resourceful they’ll become.

Finally, put them into challenging situations. Don’t protect them from failure. One of the most valuable childhood lessons is learning how to fail. What do you do next? You pick yourself back up and try again. If you go through childhood without knowing how to do this, adulthood becomes much, much harder.

If you are constantly conscious of these three things, you’re going to naturally mold your children to be self-reliant and independent. Those traits will serve them very well in whatever they choose to do in life, and because of that, you don’t need to hand them their education.

They’ll be able to make it themselves.

A final reason to save for retirement: if you do choose to help, retirement savings are usually flexible enough to allow you to help. You can often take out loans to help with education purposes from a 401(k), and you can take back your Roth contributions whenever you’d like to spend as you wish. If you decide that financial help is really needed, you can provide it with retirement savings.

So fund the 401(k) and the Roth IRA and don’t worry as much about the 529. Instead, focus your parental energies on being a parent that raises an independent and curious child.

Good luck.

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  1. bethany says:

    I think you are totally right about this, from my perspective as a student and as a college teacher. My parents helped me become a successful student, and I got scholarships to pay for most of my education. I also see students who are needy or complacent in college, and they are often people whose parents are paying for them. I think the most successful adults use college as a time to try out the life skills they’ve been building with their parents support, and earn their own success.

  2. kristine says:

    I agree with your train of thought.

    However, the ridiculous prices of ivy league and top tier schools preclude most middle class children from attending, unless they drown themselves in debt. Even middle tier schools fast approach 50K/year, and merit scholarships are all but disappearing- you’ll find this out if you are looking now.

    My kids are ivy league prepared, 99 percentile in grades and SAT, ACT, but will likely go to lower ranked schools for finance reasons. That’s fine- they will do great. But they will likely not have the entre, or connections for further upward mobility.

    It bothers me that good colleges have become accessible mostly to the wealthy. The system seems fascist. And by keeping it ridiculously expensive, the middle class kids who do attend, will be so saddled with debt that it will hold them back and out anyway.

    Good public colleges are an excellent option, but they cannot handle the numbers, and will never have the prestige that opens the same kinds of doors.

    Your bets bet is to be from Montana, Mississippi, or Alaska. As ivy league schools want regional diversity, to keep up their own connections, the competition from these 3 states is known to be much lower. A good performing child from Mississippi has a better chance of scholarships than a valedvictorian with a perfect SAT from NY.

  3. My husband and I were discussing how anymore a PhD does not always equal better pay in the work force. We both see that everyday in our jobs.
    I have kids that have incredible talents but I’m more concerned about fostering their ability to achieve in something they want to do and not be tied down to something they are ‘talented’ at. I do this because in my life what I was most talented at was not my life’s passion. If I didn’t know how to go out and learn, take a chance, totally screw up and explore new things I would be back at doing what I was talented at…and not very happy doing it.
    And I agree- DON’T hold your kids back from independent play and exploring because you are worried about them getting kidnapped. Odds are way against you on your kid getting kidnapped.

  4. Angie says:

    So you’re saying you’ve stopped contributing to your kids’ 529s?

  5. Nicole says:

    #3 MOM: A PhD has never meant better pay in the workforce. The MA (especially the MBA) generally earns you money, the PhD doesn’t. Thank goodness there’s more to life than money.

    #2 Kristine: Several Ivy league schools offer full tuition need-based scholarships to children whose parents earn under 50K/year. There are generous scholarships gradually phased out up the income scale.

  6. Yep, max out retirement savings first, then if you have the money, trickle some into that 529 or Coverdall ESA!

    Out of Range, but still on the horizon is the do I buy my kids a (reasonably cheap) used car when they get close to 15 or 16 years old… ;)

  7. Johanna says:

    I’d love to see a follow-up to this post in eighteen years, if you’re still blogging then.

  8. Maggie says:

    I am working on the aid forms with my son right now, and while the whole let the kid be independent thing sounds great in theory, in reality there is no place to check on the form “disregard our income, we are trying to teach our kid the value of a dollar”. If the parents have assets, they are included in the calculation for the family’s expected contribution. This greatly hinders the students ability to get any kind of aid or subsidized loans to try to pay for it on their own.

  9. Mol says:

    I’m not a mommy yet, but I really want to be one and am waiting until I am prepared financially. I live in Orlando and I do NOT want to be a hover parent, but I would be weary of leaving my kid alone in the backyard. Is that still safe? :/

  10. Sunny says:

    My kids are 23 and 31 and I’m still looking forward to the day they are financially independent ;-)

  11. WhirlMind says:

    Though slightly off-topic on this particular post, here are two questions, may be for the Saturday Q & A.

    1. Is it true that, when it comes to long term investments and returns, Equity, generally beats all other forms of investments ?

    2. I find that you promote traditional conservative savings forms when it comes to long-term preparations like College, Retirement etc. When you are young, and if you start saving early, putting a significant component of your savings into Equity, is one of the smart choices, no ?

    By equity, I also include mutual funds, for people who are not comfortable picking stocks. You advocate a lot on index funds, but even those you don’t seem to include in a really long term savings, say, spanning 10 years or more ? Why ?

  12. Trent brings up some good points.

    When pondering the subject, I’d venture to say that the only issue on most parents’ minds is–how to save enough for my children, how to save enough for me.

    However, it seems that what the real issues should be are–

    –set your children up (mentally) to where they won’t need as much help for college (good education=sholarships).

    –fix your onw finances to allow you to easily save more for both.

    –when applicalbe, focus on your own income generating potential to where you won’t need as much money, if any, set aside for retirement.

  13. elderly librarian says:

    I would also like to see this blog in 18 years! Children may have innate talents and curiosity and initiative, but it can be knocked out or derailed by events and circumstances. You are not the only influence in your child’s life, even if you try to provide the best possible scenario. Crap happens. I agree that Harvard is overpriced, etc. and you should send your kid where they get the best deal. I agree that retirement savings comes first. If you are “elderly” like me, you will have instant access to those funds!

  14. et says:

    Exactly. This is what played out with my child, who now has earned a bachelor’s and master’s degree from well-known private colleges. She had done very well all through el-hi. We had minimal savings & resources – she received merit & need scholarships and grants that brought the cost of the private college equal to a state university or college, and has only a relatively small amount of school loans to pay off (mostly for grad school).

  15. skywind says:

    Mol, do you mean “leery?” I am a mom, and I can tell you that I get weary sometimes. “Helicopter parenting” is exhausting! As for letting the kids play in the back yard, well, my ten-year-old walks home from the bus stop after school and seems to do just fine. If he misbehaves or doesn’t come straight home, he loses that privilege.

    You always worry, but you have to let them go sometime.

  16. Shevy says:

    Yes, well, Michael Dunahee’s parents might disagree with you. I think it’s easy for you to say not to worry about kidnapping when you live in small town Iowa. Parents in more metropolitan areas have legitimate concerns.

    That’s why I’m much more cautious with my daughter and grandkids when we’re at home in the city and give them more leeway at our rural home.

    As for the saving for university issue, I think it’s important to have at least a small amount set aside so it doesn’t seem overwhelmingly difficult for a child to go on to post-secondary education. I didn’t have the ability to put any aside with my 3 grown kids (I was a single parent for many years, receiving $100/mo, if anything, from my ex) and only one went on to any additional schooling (another is now taking some serious computer coursework, although he’s already at management level in the IT company that employs him, but I think computers are one area where genuine innate ability often trumps book-learning).

    With my youngest, $50/mo has been going away into an RESP since she was an infant. The Canadian government matches 40% of that amount. It won’t be everything she needs by a long shot, but she should be able to do at least a couple of years of college, university or seminary. And, if she’s a good student or motivated, she’ll have access to scholarships. Beyond that, yes, she’ll probably have to come up with some money herself if she wants to complete a degree. (After all, we’ll be hitting retirement age at about the same time as she finishes high school.)

  17. elderly librarian says:

    No excuse for “smarty pants” kids not to get funding for college, somewhere. Another strategy: work for a college and get tuition benefits, although these may be going out of style and/or you may have to pay tax on these perks in the future.If Obama wants to emphasize education by offering more credits or supplementary help, that would be good.

  18. Mary W says:

    I think Trent made a great point about praising children for hard work rather than natural talent. I saw reference to a study one time (don’t ask where ’cause I can’t remember) which said that Japanese students credited “hard work” for their successes while American students credited their “intelligence”. Guess which group works harder?

  19. Mule Skinner says:

    @Money Reasons –In my opinion giving a car to a teenager is not a good idea. (1) It distracts them from academics. (2) It enlarges their range tremendously – the next town 20 miles away is now included in their stomping grounds. (3) There is a tendency to “work for the car”, i.e, do after school jobs in order to pay for accessories, gas, maintenance, etc.

  20. Johanna says:

    @Mary W: On the flip side of that, I’ve read about many studies (several of which are described in the book “Why so slow?” by Virginia Valian) that found that teachers and parents alike tend to attribute boys’ achievements to innate talent (especially in math and science) and girls’ achievements to hard work.

    And girls can find this discouraging. They can start to believe that they really are less talented than the boys and that their future hard work is less likely to pay off. So they stop trying as hard.

    As always, there’s a need for balance. Praise and encourage hard work, but don’t ignore their talents.

  21. Maggie says:

    I do not want to argue, but just let me say that all of you who think if your kid is just smart and hardworking enough there will be plenty of scholarships to be had, please just be sure to have a plan B as well.

  22. cynthia says:

    I have to disagree on the kidnapping risk. I don’t have a big risk of being in a car accident, but I have insurance in case it happens. There may be a slight chance of having my home broken in to, but I lock my doors and try to ensure that things are safe. Similarly, there may be a small risk of child abduction, but the consequence would be so detrimental that I am really not able to risk leaving a small child unsupervised. I live in a small midwestern town, yet at least twice in the past 4 years there appeared to be attempted child abductions. Once near my neighborhood a couple in a van slowed down and tried to take a young child playing alone on a street. Thankfully, this was prevented by a passers by, but I would not want to expose my child to this risk–ever.

  23. Lily says:

    And let’s not forget that kids have a thing called, “free will.” No matter how great you think you are doing as a parent, kids will do what they do, regardless. So don’t beat yourself over it wondering what YOU did wrong, instead, focus on loving your kids through it all and be there for them – not in an enabling way, but in a way that makes them feel secure in knowing someone loves them unconditionally.

  24. Nicole says:

    @Johanna– Fantastic book, Why so slow? One of those I think everybody needs to read. (Though in this case, I agree with Mary W– the problem is that girls’ accomplishments are denigrated as well, not just their innate abilities.)

  25. Ben says:

    I’m really late on this string of comments but wondering if you can flesh out the praise for improvement not for natural talent?

  26. J says:

    @Mol — there is no good time to have kids. You’ll never be fully ready financially, either — although some times can be better than others, of course. But if everyone waited to have kids till they were “fully ready”, the human race would die out quickly.

    I don’t know what your backyard looks like, but I’m guessing it’s pretty safe to let your kid play there. Actually after a while you’ll be happy to let the kid run around outside for hours because they tire themselves out.

  27. Evita says:

    Trent, do you have a crystal ball? why do you assume that in 15 years it will be easy to get scholarships, grants, student loans and part-time work for your children?
    The way things are going, I would not bet on it!

    And do you know how many worthy students drop out because it is just too hard to work and to find sufficient time to study and that, for years? (only some of them come back to school later, after having lost years of good income).

  28. bb says:

    Most Ivy League schools now only require parents to pay 10% of their income for tuition, isn’t that true?

  29. Steve says:

    “Teach your children to be independent and they will find a way to go to college” seems an awful lot like “do what you love and the money will follow.” Nice in theory, but here in the real world, you can’t get by on rose colored glasses and passion alone.

    That said, I would max out tax-advantaged retirement savings and pay off the mortgage first. But if you can find a few extra dollars in your budget to save for college, well, it can’t hurt.

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