5 Investing Ideas for Parents of Recent College Grads by John Nowak, CFP®Submitted by Moller Financial Services on May 24th, 2018
May traditionally brings flowers, blooming trees, Mothers' Day, and Memorial Day. For parents, schedules are also filled with performances, school picnics, field trips, and the start of spring/summer activities. The biggest activities of the month recognize the accomplishments of this year’s graduates. Graduations represent BIG transitions for families. Kids are growing up and taking on new responsibilities whether it is going into high school, college, or their first job. As with any transition, it is a good opportunity to consider financial opportunities.
Below are five investing ideas if your child is graduating college. While your graduate may be from grade school or high school, it is never too early to plan. Like Ferris Bueller said in the 1986 classic movie, Ferris Bueller’s Day Off, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” In other words, plan ahead, or you might miss an opportunity.
Invest in your health
A 20+ year retirement is much better if you have the physical health to enjoy it. While diet and genetics are perhaps the most important factors for many health statistics, group physical activity can enhance your lifestyle in many ways.
First, participating in a group activity expands your network, community, and support system. There is truth behind the cheesy phrase Together Everyone Achieves More (TEAM). The group helps push your efforts beyond your comfort zone and is a support system, especially when you need it most. The team may also motivate you to higher performance and improve your commitment and accountability to your goals.
Second, your group activities can become a new outlet for your time and energy. Maybe you will have more available time with children away from home. Perhaps you can spend more time on yourself in retirement or are scaling back hours at work. Your group activities can become an important part of your daily routine. You might start to wonder, "how did I ever have time to work or take care of the kids?"
If you are looking for ideas, consider yoga, cycling, barre, interval training (HIIT or Tabata), CrossFit, WERQ, boxing, Pilates, martial arts, or Orange Theory. There are a ton of other ideas, but trying these will keep you busy while you find what works best for you.
Make extra principal mortgage payments
Does the following scenario sound familiar? Five years ago, Chris and Joan refinanced their $500,000 mortgage at age 48 with a 20-year loan at 4.0%. Their monthly payments are $3,030 ($36,360 per year). If they continue making the minimum payment, their mortgage balance will be $248,571 at age 60 when Chris wants to retire. Joan was really hoping to have the mortgage paid off by then!
In retirement, the question becomes “what percentage of my portfolio am I withdrawing each year?” not “how low is my interest rate?” A retirement withdrawal percentage over 5-6% may be a concern. So, a 14% mortgage payment rate ($36,360 annual payment ÷ $248,571 loan) could cause problems if a bear market brings the portfolio value down, even temporarily. If Chris and Joan increase their monthly payment from $3,030 to $5,600, their mortgage would be paid off by Chris’ retirement and their retirement plan will likely be in much better shape.
Invest for pre-Medicare health insurance
If you want to retire before age 65 and do not have a retiree health insurance benefit from a former employer, you will need to purchase private health insurance. Insurance premiums for a 60-64-year-old couple in the Chicago area cost about $22,000 per year, not including deductibles and copays. Between making extra mortgage payments and saving for health insurance, you may realize the cost is like sending another child to college.
Invest in Social Security deferral
After making plans to pay off the mortgage and save enough for health insurance, the next investment could be for deferring Social Security. Deferring Social Security generally makes sense if you expect to live into your mid-80s AND you have the financial ability to delay claiming benefits.
The incentive for delaying Social Security is your benefit grows 7-8% for each year that you defer. The cost is one year’s worth of forgone retirement income. To make this deferral decision easier, consider self-funding a Social Security replacement account so you can delay Social Security as long as possible, but still have cash available for retirement.
Matching program for your graduate
If your retirement plan is in good shape and you still have extra cash to save, consider a matching investment program for your recent grad. You could incentivize your child to save by matching their investment savings with your own contribution. The long-term benefits are incredible.
For example, a single $5,500 investment will grow to $56,000 in 40 years at 6% after-inflation growth. By investing this amount into a Roth IRA, that money would be tax-free. The magic of compounding over four decades is incredible – 10x tax-free growth!
With those five ideas in mind, have a happy graduation season and unofficial start to summer. If you would like to consider or implement these ideas, we are here to help.