Baby Boomers, especially those in their late 40s and early 50s, could be heading into financial disaster. And, while they’re at it, they could be failing to teach their Millennial children the fundamentals of financial literacy, propelling yet another generation into economic insolvency. The good news is that this dark scenario can be prevented.
Clearly, for Baby Boomers now in their middle age, it’s the time for saving for retirement, especially since fewer organizations are providing pensions and many of those that do can’t adequately fund them. In addition, the odds are high for unemployment in a turbulent economy, therefore reserve funds are needed. Simultaneously, their assets, such as the value of their house and their 401K, likely have been reduced during the past several years. Yet, reports Ameriprise Financial, only 24 percent have been doing anything to ensure their financial security. A major reason why is that 93 percent continue to support their Millennial children after they are already adults.
That extended financial dependence is happening because Baby Boomers came of age when living standards kept going up. Factory workers in Detroit had not only a single-family house but also a cottage up north. Things got even better with the longest bull run in the stock market from 1982 until 2000. No surprise, Baby Boomers became used to spending how much they wanted, for what they wanted, and when they wanted. A priority in their spending has been their own children. That has taken the form of being the first generation in America to take on the responsibility of seeing to it that their children go to college and that they help pay for it. Currently, 71 percent are signing for thousands of dollars in student loans for their children.
Often Baby Boomers do this without shopping around for the most favorable terms and conditions, including interest rates. And that in itself eventually could lead to insolvency. For example, those “parent” loans called “Plus” have an origination fee of about 4 percent and charge 7.9 percent interest, which commences as soon as it is signed. Some parents could be paying nearly $1,000 monthly for many years, and if they default, their Social Security check will be docked. For some, Social Security will be their only income.
Had they investigated, they might have opted instead for a lower-interest equity line of credit, which is tax-deductible. Or, a much more financially self-protective initiative, for both themselves and their children, would have been to enlighten their offspring on how the expense of a college degree is primarily a financial problem that has many possible solutions.
For example, the cost could be downsized through first attending a community college and then transferring to a state school. Moreover, that total would be manageable through loans the children themselves sign, with federally subsidized ones at about 3.4 percent interest and unsubsidized ones at 6.8 percent interest. Another approach would be to apply the return on investment (ROI) model for enrolling in College X, with graduates in the humanities or math earning so many dollars for the first 10 years. The issue then becomes which college provides the best ROI.
The college cost, of course, is just one small piece of how Baby Boomers can be creating financial literacy among their children. There should be frequent lessons on that, ranging from what smartphone family plan is the best deal to the difference between good and bad debt. A teaching tool could be online banking for their children. Together Baby Boomers and Millennials could track what comes in and what goes out, analyze patterns, and then do course correction.
If the goal of financial literacy is achieved, then Millennial children likely will be taking more entry-level paid jobs with benefits in fast-food restaurants and big-box retail instead of chasing serial unpaid internships which don’t seem to be leading to any of those glamour jobs. In time, those college graduates who didn’t overpay for their degree would be downsizing their own student and car loans, maintaining bank checking and savings accounts, and contributing to the company retirement plan. Also, they would gain knowledge of the organization’s systems, which could lead to internal promotions and be leveraged to jobs elsewhere.
Financial literacy really represents a grown-up perspective about the value of money, how that money gets earned, and how it turns into wealth. This, not a college education per se, could be the best legacy Baby Boomers can give to their children. And it doesn’t cost a dime, only time.