As we enter the summer, some exciting transitions are happening in our AFA family. My youngest daughter, Jen, has graduated from college (making me an official “empty-nester”). Charles Crowley and his wife, Erin, are about to welcome the next generation of “AFA babies” into the world as they become first-time parents. And, Julie Andrews has welcomed her first grandchild, a baby boy named Wilson.
These are certainly all joyful events, but each one of them brings change and challenges. How do we adjust to these changes, and as parents how do we guide our children in their transitions?
Helping Your Young Adult “Launch” Successfully
As we see our time of “active parenting” winding down, it can be difficult to change gears in our relationship with our children. We want to continue to advise and coach, just at the time our children are eager to break out and make important decisions on their own. Navigating the changing roles can be challenging. Adjusting financial relationships can be even more difficult. A new client once asked me if I could identify the most common financial error that we see that caused a client’s financial plan to “fail.” As I thought about it, I had to put near the top of the list (right after emotional investing and overspending in general) the tendency of some parents to continue to overspend on and support adult children. Paying for their cell phone bill for a few years after college won’t be catastrophic. But building a habit of bailing out adult children creates a financial dependency that can “cripple” the child and turn a pleasant retirement into a strained one. So as I enter this new phase of life with Jen, we are working hard to make the financial transition a successful one. While I rarely get everything right as a parent (especially in execution!), here are the steps we are following:
- Working out a budget before she commits to any post-college expenses
Jen is blessed that she has an exciting job opportunity in Tampa with excellent benefits, so we know exactly what her minimum income will be and what her expenses will be for benefits. We have worked on tracking her “lifestyle” spending for the last two years using Mint.com, so we have some idea of what this is likely to be after we adjust for a post-college lifestyle. She has agreed she wants her housing expense to be comfortable and allow her the financial flexibility to deal with the unexpected and still enjoy life after college. So she has found a roommate and will keep rent at a comfortable level until her career is more established.
- Building financial discipline
She learned in college that she needs to do a “financial check-in” on her budget on a weekly basis. She is scheduling a set time each week to review the reports Mint.com generates, so the small “extras” don’t create a big problem at month end.
- Beginning a savings habit
We have reviewed her 401k plan at work, and Jen has built into her budget a contribution rate that will allow her to receive her company’s full match right off the bat. We will work together to select the investments she will use, and she has decided on a system to increase her contributions to the full $18,000 allowed at her age as her income increases.
- Establishing a “glidepath”
We are working through a transition plan – what specific expenses I will cover between graduation and the start of her job, what contributions she can expect as she sets up her new home, and what expenses will be transferring to her, and when. Then she can plan ahead for rising expenses.
- You are on your own now…
One of my favorite books about preparing your student for college is You’re On Your Own Now (But I’m Here if You Need Me): Mentoring Your Child Through the College Years by Marjorie Savage. The book title is the theme for how we move into this next stage of life. I am there for support and advice (when asked, if I can keep my mouth shut the other times…). But she understands that I am not there to bail her out. She will have to work her way through the inevitable financial surprises and challenges, and I have encouraged her to prepare for them by building a financial safety net on her own through building up her “emergency funds” in the bank to a level equal to 3 to 6 months living expenses. Keeping in mind that she is the wonderful young woman she is today because she experienced and learned from the consequences of her behavior throughout her life gives me resolve to allow her to have the same learning experiences financially, too.
Supporting First Time Parents and Welcoming a Grandchild
As I see Charles and Erin prepare for the birth of their first child, how well I remember the night we brought our oldest daughter home from the hospital and how the ensuing weeks and months were scary, overwhelming, exhausting and the most magical times of our lives. On the other hand, welcoming a grandchild (I am told!) is an amazing experience - better than parenting the first time around - with all the joy and much less of the worry and responsibility.
- Setting Boundaries
We have seen many inspiring examples of how clients support and guide their children during this transition. Some of our clients choose to get actively involved in caring for grandchildren, if their stage of life and location allows. Our best words of advice if you are considering taking on physical care giving is to communicate very clearly and set clear boundaries about the involvement you are comfortable with. Being on constant call and having childcare responsibilities overtake the rest of your life can be exhausting and lead to resentment. It can also create a financial dependency that is hard to break, since it can be difficult for parents to find the dollars to pay for childcare later after growing accustomed to “free” care.
- Providing Effective Financial Support
What is the best way to provide financial support if the parents need help with medical bills, or childcare or education funding? Remember that gifts made to children or grandchildren are potentially subject to reporting for gift tax purposes unless under the annual exclusion amount, which is $14,000 for 2017. (For more information about gift taxes and form 709, click here.) But, if the grandparents are married, each spouse has an annual exclusion amount and can give that amount to each parent and/or the child as well. This could translate into two grandparents being able to give up to $28,000 in a joint gift to both parents of the grandchild – so $28,000 to the mother and $28,000 to the father and even $28,000 to the child (using a custodial account)! And if gifts are made directly into a 529 plan, there is a special election available that can allow each parent to make an upfront contribution equal to five years’ worth of gifting, while still falling under the annual exclusion amount. This translates into a maximum contribution per grandparent of up to $70,000 ($14,000 times 5 years) or $140,000 per gifting couple per grandchild. I can imagine how much I would have loved to get that kind of head start on planning for college!
If confronted with a need and desire to provide support at larger amounts, be aware that a special exemption is available in cases where the checks go directly to medical facilities or educational institutions to cover someone else’s expenses. In these cases, the gifts can be unlimited and still won’t trigger a gift tax issue.
Embrace All Seasons of Life
As we welcome the changes coming to the AFA family, we want to say “Congratulations!” to all of you who are experiencing similar joyful (and perhaps stressful) transitions. Please call upon us if we can help in any way as you navigate the exciting and challenging developments on the road ahead.