With an average of $9,100 in student debt, according to TD Ameritrade surveys, millennial parents are all too aware of the financial realities of higher education.
About one-third expect to still have loan payments when their children leave for college, and they don’t want their children to inherit similarly poor financial fortunes. For this reason, 90 percent said they plan to pay at least part of their children’s college fees, and 19 percent said education is a top financial priority.
Already, millennial parents are putting an average of $310 aside per month for the next generation’s schooling, while grandparents contribute an additional $205 monthly.
The Retirement Trade-Off
The education emphasis has hijacked family budgets at the expense of late-life planning. Emergency savings rank second in millennial priority, while retirement funds rest third.
As parents put their children’s futures above their own, the priority may be noble, but it isn’t necessarily advisable.
“These millennials are clearly juggling many things. They are spending somewhere around $230,000 just for the first 18 years of raising one child, and then add to that buying their first home, paying down their own college debt,” Dara Luber, retirement and investing expert at TD Ameritrade, told Benzinga. “They clearly have a lot of priorities, but saving for retirement should be top, first and foremost, and then saving for college. While it is encouraging to see that they are saving for college, they need to make sure that they budget accordingly.”
Millennial parents are acting with the next generation in mind, but the specifics of their plan may backfire. Neglecting their own retirement accounts could actually prove detrimental to the very children they’re working to empower.
“I think it’s important that parents not be a burden for their kids when they are ready for retirement, so preparing themselves for their own retirement, they are putting themselves first,” Luber said.
Habit Or Nearsightedness?
The education priority is not necessarily a symptom of poor financial literacy but rather general myopia. Millennial parents see that education is a more immediate need than retirement, but they don’t realize that, in the scheme of things, it may be less important.
“I think that millennials are still paying down their own student debt, and by having that debt, they’re recognizing that college is expensive, and they’re seeing that in their children’s future and they maybe aren’t seeing retirement [or see it] maybe a little bit further out for them, so that’s how they’re creating those priorities,” Luber said. “So they recognize the importance of saving for college, and while they likely recognize the importance of saving for retirement, they’re looking at what’s coming first.”
On the other hand, their expectations to fund their kids’ education may be inspired by recent dependence on their own parents.
“There’s kind of this delayed adulthood, if you will, that could make it more likely for these millennial parents to have the expectation that they would support their children longer in life, because they’re being supported, themselves, for a longer period of time, maybe up to age 25 or so,” Luber said.
Factors Beyond Sacrifice
TD Ameritrade found that, on average, each millennial parent receives an average of $11,011 per year in combined financial support and unpaid labor from their parents.
About 54 percent of grandparents reported that saving for retirement while supporting adult children is “very stressful” — but 80 percent won’t decrease their contributions. Neither will they (98 percent) lessen aid for their aging parents.
Millennial parents are refusing similar sacrifices to bolster their retirement funds. About 95 percent said they aren’t willing to lessen financial support for aging parents, and 88 percent won’t spend less on their children.
“Nearly one-third of millennial parents say they would work longer to make up the difference, but as we age, that’s not always possible,” Luber said in a press release. “Their children, on the other hand, have more options to help cover the cost of college.”
Achieving Balance
But the “pay yourself first” financial strategy is still advised.
“Certainly make sure that you’re covering your own retirement first,” Luber said. The emergency fund comes second and education third, with specific allocations dependent on income.
“I think it’s important to save early and save often and note that every little bit that you’re saving, whether it be for your own retirement or for your children’s education, means more money that you or they could have in the future,” she said.
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