What does it take for millennial moms to succeed when investing for our children? Surprisingly, it requires putting ourselves first.
If you’re stuck in the parenting and personal finance algorithms on social media – which btw, chances are good you are if that’s where you found me – you’ve probably absorbed plenty of punchy advice on how to set your kids up for financial success.
UTMAs! Roth IRAs! Invest $5 every 30 minutes to make your baby a millionaire!
While this content *perfectly* illustrates how powerful compound interest will be over your baby’s long lifetime, I think most creators put the cart before the horse. I’ve been guilty of this myself.
If you’re a millennial mom investing for your child’s future, there are some prerequisites you should consider first. Most importantly, you should be financially stable yourself, and I’d even go as far to say on track for your own retirement, before you start stacking Benjamins for Junior in his own account.
If you think that sounds gate-keepy, keep reading. We’ll inspect why you should be your top financial priority, determine if you’re on track for retirement, and explore a flexible investment account to save for you and your kids.
Millennial Moms, Investing for Ourselves is Actually Selfless
Millennials are wedged in a chasm between two mega expense mountains: student loan debt & saving for our retirement. Throw some other reasonable financial goals into the mix – like buying a home and sending our kids to a decent school – and it becomes obvious why so many millennial moms investing for our kids share this sentiment: I’m a financial lost cause, so I’ll just focus my energy on helping my kids level up.
If we can give them a different starting point in life, hopefully our children won’t face the same financial woes as us. This often looks like millennial moms investing too little for our own retirement and in turn, committing money to accounts titled in their children’s names, like 529 college savings plans.
On paper, this strategy checks out, partly because your child has such a long time horizon. Their money will grow and compound until they use it decades later. On a human level, however, it’s highly flawed, at best.
If you’re not on the right financial trajectory yourself, but you’re envisioning your child’s comfortable future born from your sacrifices, snap out of your daydream. I’m afraid you might just be swapping out their student loan balance for a different, less tangible form of financial stress. And in this case, I say better the devil you know than the one you don’t.
Investing assets in accounts titled in your child’s name can compromise your family’s access to them. If you need money to live now, but it’s locked up in these accounts, the strain won’t go unnoticed by your kids. We know today that children who experience financial instability growing up see it manifest in unintended ways later in life.
Further down the road, there could be other ramifications with a hefty price tag. If you’re not investing enough money for your own retirement now, while it still has time to grow, chances are high you’ll become their aging millennial mom scooting by on Social Security and other government assistance.
You clearly love your children. (Look at you! You’re like 1,000 words deep into a blog post on how to invest for them. 😂) For supporting them during childhood, they’ll want to return the favor as adults. Even if you plead with them not to worry about your financial situation, it’s unreasonable to expect them to turn a blind eye with a clear conscience.
Despite the broke millennial stereotype, it’s not uncommon to support our own parents. A 2020 research study by GoHealth found that about 30% of millennials assist their aging parents financially. This is despite older generations having greater access to guaranteed income streams in retirement, like pensions and a fully funded Social Security system.
Women tend to outlive men, which means we have longer, more expensive retirements to fund. Plus, with more of the burden of saving for retirement shifting to the individual (*cough* defined contribution plans *cough*), my hypothesis is that a much higher percentage of millennial moms will require support from our children later in life. That is, unless we prioritize ourselves now.
Am I On Track for Retirement?
You’re ready to start investing for your child once you’re financially stable and on track for retirement, but what does that actually mean?
Retirement is an amount of money and not necessarily an age, and the amount you need will be different for every family. I hope it also goes without saying that just because you’re on track for retirement, that doesn’t mean you can stop saving for it altogether. It just means you can now swing investing money in other buckets simultaneously.
Let’s use my family as a benchmark. We’re a pretty “average” family who lives in Pittsburgh, PA. What makes us a decent comparison is that we have living expenses of about $70,000 a year. This is just over the national average spent by American families in 2021 of $67,000, according to the Bureau of Labor Statistics.
Our numbers: I’m a millennial mom who’s 33, and my husband is the same age. The Social Security actuarial tables say my life expectancy is 82 years old. Assuming we retire at about 65, that leaves us with 17 years of retirement to afford.
If we want to spend about $70,000 a year in today’s dollars during each of those years, we’ll need at least $1.5 million locked and loaded by the time we enter retirement in 32 years. We could get to that magic number by:
- Investing a lump sum of ~$185,000 today
- Investing at least ~$14,000 a year until we retire
As you’ve probably deduced, this means that unless we have at least ~$185,000 invested for retirement already, or we’re able to consistently invest ~$14,000 every year for the next three decades, we’re not on track for retirement. Use these numbers as a rough benchmark to compare to your situation as a gauge.
Until you’re on track, you should focus your investment energy on contributing to your own tax-advantaged retirement accounts in this order. Doing so will create a pile of money for you to use after you reach age 59.5.
Next, we’ll explore the account type that may let millennial moms investing for our children have our cake and eat it, too. 🎂
A note: My husband and I have a fairly aggressive risk tolerance, investing mostly in diversified stock index funds. In my calculations, I use a 7% return. If you’re a more conservative investor, your portfolio will probably hold more investments like bonds. These tend to be more stable (yay!) but have less upside over time (womp, womp). If you’re more conservative, you’ll need to sock away even more than this for retirement, all else equal.
Mini rant: It’s hard to plan for your future if you don’t know how much money you spend. If you’ve never tallied up exactly what you’ve spent over a few months – trust me – you will be wrong when you try to guess. This is the spreadsheet I use to track my family’s spending.
A Solution: Earmarking Money in a Taxable Brokerage Account
Investing for your children doesn’t have to mean putting money in an account titled in their name. By opening a taxable brokerage account in your own name, millennial moms can earmark future money for our kids.
Like the name implies, taxable brokerage accounts are taxable, but they’re still relatively tax efficient. You’ll owe income tax on dividends & interest income in the year they’re received.
However, if the price of an investment goes up after you buy it, you only owe tax on the gain after you sell the holding. The capital gains tax rate, which is 15% for most of us, will be levied on your price appreciation.
Two features of a taxable brokerage account make it an ideal vehicle to invest for your child if you aren’t on track for retirement yet.
- This type of account is liquid, meaning you maintain access to the money at any time. Unlike retirement accounts, there’s no penalty on early withdrawals. (Just be mindful about going HAM in stock index funds if there’s a chance you could use the money in the near term. Needing to sell riskier investments during a market blip spells trouble.)
- Storing assets in a taxable brokerage account allows you to defer the decision of who gets how much and when they get it until later, when you’ll have more information. Contrast this to plunking thousands of dollars into your baby’s 529 plan while they’re still in a sleepsack. You don’t even know who this little person will be yet.
There are also some tertiary benefits of keeping the money in your name, like qualifying for better financing on an mortgage application. Having more assets can make you a better borrowing candidate.
You are giving up some tax advantages with the earmarking approach, however. The biggest opportunity cost for most families is not using a 529 college savings plan. By saving in a 529, you can use the assets fully tax-free as long as they’re used on qualified education expenses of the beneficiary. Plus, some states allow a tax deduction in years you make a contribution.
For the benefit of solidifying your own financial foundation, I believe it’s worth it to forgo these benefits. I’d still recommend opening up a 529 account, however, as a landing place for family members’ generosity.
You’re used to putting your kids first, but I’m asking you to make an exception. Millennial moms investing for our children should prioritize our own needs. Locking up money for specific purposes in your child’s name is risky if you’re not yet on track for your own retirement.
Prioritizing yourself is actually selfless. You could be sparing your kids from childhood financial stress and the future burden of bankrolling your retirement.
You can still invest for your children! To do it with flexibility, consider earmarking money in your own taxable brokerage account. You’ll give up some tax benefits, but to maintain access to money and to delay the decision of how much to give to who and when, the tradeoff can be worth it.
Demonstrating good habits and developing a healthy relationship with money are some of the best financial gifts you can give your kids. By leading through example as you steward your family’s finances, talk with them about it. Teaching them how to fish is just as valuable as any sum of money you could give them.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.