The under-30 crowd crosses three generations, with Gen Z sandwiched in the middle and the youngest millennials and the newest generation – Generation Alpha – on either side. The common thread: opportunities for financial planning.
“Whether you are a new parent or have young adult children, there are steps you can take now to help shape the path to a healthier financial future,” said Maya Brill, senior wealth strategist at Regions.
Brill recently penned an insightful piece on major life events and financial milestones from birth to retirement. In March 2023, we highlighted retirement tips for those 50 and older, and today we are going to dive into the opposite end of the spectrum.
As Brill points out, the birth of a child can be one of life’s most altering events.
While decorating the nursery, coming up with just the right name, and celebrating with family and friends are top of mind during this joyous time, it is also a time to start thinking about the future.
“Two of the most important financial aspects of having a baby are life insurance and college planning.”
The Financial Future
“Two of the most important financial aspects of having a baby are life insurance and college planning,” noted Charlene Reyes, Regions Private Wealth Advisor, based in Mobile, Alabama.
Kids are expensive. And one of the first things Reyes recommends to her clients as they become new parents is to look at life insurance once a child is born.
“You have the option to add a child rider onto your own policy– or take out an appropriate life insurance policy for the minor child,” said Reyes. “It isn’t something we want to think about, but it is important to recognize and plan for an event like a terminal illness or a disability that can make a child uninsurable, this will provide for life insurance protection.”
According to Education Data Initiative, the average cost of attendance for a student living on campus at a public in-state institution is $25,707 per year, or $102,828 over four years. Out-of-state students pay $44,014 per year or $176,056 over four years. And private, nonprofit university students pay $54,501 per year or $218,004 over four years. And that was as of October 2022.
If you are currently expecting, you can expect to pay a lot more by the time your child goes to college.
A college savings account such as a 529 can be set up for as little as $25. And contributions aren’t just limited to parents. Other family and friends can contribute. With these accounts, the parent is the owner, with the child as the beneficiary. A perk here is that the beneficiary can be changed if you don’t end up needing all the funds or if the child chooses another path.
“When the beneficiary goes to college, if they earn a scholarship, the beneficiary can be changed to another child,” said Reyes. These accounts grow tax deferred, and distributions are tax free as long as the funds are used for K-12 or higher education, regardless of what state you are in. The Secure Act 2.0 also allows funds after 15 years to be used – up to $35,000 – to fund a Roth IRA for that child.”
“I recommend getting started with a 529 Plan early,” said Reyes. “If you contribute up to $10,000 per year ($5,000 per person or $10,000 per married couple), that can be deducted from state income taxes in Alabama.” She noted that every state is different so she advises individuals to check with their CPA or state department of revenue for their situation.
Moving Into Adulthood
Brill notes in her piece that in the event a child becomes incapacitated, a parent’s legal right to act on behalf of their child for medical purposes ends in most states when a child reaches age 18.
“It doesn’t matter if your child is on your health insurance or if you’re paying theirs, you won’t have access to their medical information or be able to make decisions on their behalf,” said Brill.
As she states in her article on financial milestones, should an event arise where the child becomes unable to make their own decisions, parents may petition the court for guardianship or a temporary power of attorney. Having your child complete a medical power of attorney authorizing you to act on their behalf should they become incapacitated, will allow you to avoid the stress, time and expense of involving the courts in the event of an emergency.
Brill suggests that clients consider opening a joint checking account with their children prior to reaching legal adulthood. At Regions, a joint account with a minor can be set up as soon as a child has a government issued picture ID.
“I recommend setting up a checking account early to begin teaching your children about budgeting and general money management.”
I recommend setting up a checking account early to begin teaching your children about budgeting and general money management,” Brill said. “Teach them the importance of building credit, so they aren’t doing things from scratch as an adult.”
“Regions offers an Explore Visa credit card to help customers build credit. Secured by a savings account with a $250 minimum requirement, this card is a great way to begin building a positive credit history,” said Reyes.
Some children may have a financial parachute in the form of a Uniform Transfers to Minors Act (UTMA) account. The age that these become available to the child can vary. In most states, these become available to adult children at the age of 21. That said, certain circumstances can give parents pause about whether the adult child is responsible enough to access those funds at that still-young age.
“If a parent feels they have overfunded the UTMA account and are concerned about transferring it to their kids, those funds can potentially be rolled into a 529, extending the timeline of when they would ultimately receive the funds,” noted Brill. “Parents or guardians can spend down some of the assets in the UTMA to start paying for things for the adult child’s benefit.”
Money Management is Key
Reyes noted that at age 21, many adult children are either recent college graduates or are early in their careers.
She recommends the following:
- Start looking at creating a cash flow and building a balance sheet to get a visual and begin working towards positive cash flow, paying down debt and building credit.
- Understand your regular bills and what is owed, and ensure those monthly payments are being made.
- Build an emergency fund of 6-12 months’ saving.
- If you are working and have 401k or other retirement options available, begin making contributions, whether the employer offers a matching plan or not.
Regions’ Next Step financial wellness program offers resources and tools to build a financial foundation around banking basics, money management, budgeting, saving and more.
The youngest millennials are turning 27 in 2023 and may be thinking about paying off student loan debt, homeownership and possibly budgeting for a family. Some may already be thinking about retirement planning, but often at this age this is not a top priority.
“Retirement has been re-prioritized and this generation in many cases plans to work part-time in retirement, so the retirement conversations are changing,” noted Reyes. “Here, a Roth IRA or Roth 401k is ideal.”
She adds that while retirement might not be a priority at a young age, it can certainly be a missed opportunity that can’t be replaced in later years.