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Employee Perspective: Stephanie Hughes on Financial Strategies for the Second Generation

by Stephanie Hughes

All employees have financial concerns, but for those who are also parents, these concerns can be especially overwhelming. From childcare to higher education, financial worries can spill over into other areas of life, including work. While this type of stress can adversely affect the health and well-being of individuals and their families, it can also hinder employees’ happiness, engagement, and productivity at their jobs. Therefore, it’s in employers’ best interest to help assuage employees’ financial stress related to their children as much as possible. In this article, I’ll share some helpful strategies for both preventing and managing these issues.

Planning for College

According to the College Board’s “Trends in College Pricing 2019” report, the average cost of tuition and fees and room and board at a four-year, public college is $21,950, and that number more than doubles for a private, non-profit college ($49,870). For the average family, this presents a major financial burden that is often passed on to the child in the form of college debt. The good news is that there are numerous ways for parents to begin saving for college long before it becomes an issue, such as through a 529 plan. Traditionally 529 plans allow savings to grow tax-free as long as the money is ultimately used for college education expenses. However, the 2017 Tax Cuts and Jobs Act now allows parents to withdraw up to $10,000 annually for private elementary and high school costs.

Another related option is a Coverdell Education Savings Account (ESA), which can be used for books, supplies, and tutoring in addition to tuition and related expenses. Coverdell ESAs have a $2,000 annual contribution limit, and there are also federal income limits that apply each year ($190,000 for married couples filing jointly, and $110,000 for those filing singly in 2019).

Regardless of which college savings plan parents choose, the key is to start early and contribute as much as possible. The more that employers highlight and facilitate these plans, the better off employees with children—and the businesses they work for—will be.

Planning for Retirement

Another major issue many employees face is retirement planning. Even more so than with college savings, starting early is crucial, as is taking advantage of employer matching programs. Retirement planning becomes a layered issue for parents who are both saving for their own retirement and thinking about their children’s financial future. Can children even save for retirement? The answer is yes, and it behooves parents to get educated about the process.

As long as a child can show that they have earned income, they can open and contribute to a retirement account, with an annual contribution limit of $6,000 in 2019. There are two main options for these accounts: a traditional IRA, which provides an up-front tax deduction, and a Roth IRA, which provides a tax break on the back end. In a traditional IRA, pre-tax dollars fund the account, and withdrawals after the individual reaches age 59 ½ are taxed at the current tax rate. In a Roth IRA, after-tax dollars fund the account, and withdrawals after age 59 ½ are tax-free. For most children, the Roth IRA is the better choice, since they will likely be in a lower tax bracket as teenagers compared to when they retire.

While parental assistance with retirement can have a big impact on a child’s future financial stability, it’s important for parents to remember that their own retirement is more pressing. Employers can help keep employees focused on their own plans by offering adequate information as well as incentives such as matching contributions.

Considering Generational Differences

Age differences within a workplace can be a challenge, not only for the employers who are working together but also for the managers who oversee them each day. While some employees in a company may have family concerns and be thinking actively about retirement, others may be just starting their careers, with parenting and retirement far in the distance. Technological advancements have only increased this gap, making communication more difficult between workers of different generations. In addition, with many organizations shifting away from defined benefit plans in favor of defined contribution plans, the burden on the employee to handle their own financial future is increasingly great.

For these reasons, it’s important for employers to provide as much education as possible around benefits and retirement so that employees feel prepared and supported. While in the past a one-size-fits-all approach may have been sufficient, today employers would be wise to offer guidance tailored to each demographic’s specific needs. For example, an employer may focus on educating younger workers on ways they can save for retirement while also paying down their debt, and educating older workers about catch-up contributions available for workers over age 50. Employers should also keep in mind that these different age groups may have very different learning styles. Therefore, offering education in various forms, ranging from brochures and infographics to videos and podcasts, will help employers cover their bases and ensure that everyone gets the information they need.

Family Office, Financial Strategies, private client advisors

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