Investing for Parents: Saving for Retirement, Avoiding These Mistakes | Economic news

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One of the first times I started freaking out about money was when I found out I was pregnant in 2017. I had no dollars in an emergency fund, no retirement savings and I wasn’t earning enough to support a baby as an underpaid freelancer. writer.

Elizabeth Ayoola and her son.

In several articles I read about “easy ways to make money” investing was an option. However, I always skipped this suggestion because I was not a math whiz. It also felt like a source of income reserved for more discerning people with excess cash.

Once I finally accepted that there was no get-rich-quick scheme, I returned to investing. It seemed like one of the few ways to save for my son’s future and build wealth over time. I made a lot of mistakes when I started because who has time to learn how to choose an exchange-traded fund when you have a tornado for a toddler, a full-time job, and you can at barely stay awake long enough at night to engage in a hobby?

A few random ETFs and lots of self-education later, here’s what I think every parent should know about investing for retirement.

Invest for yourself first

Some parents often think they have to be selfless, putting their needs after their children’s. As one of those parents, saving for retirement was at the bottom of my priority list. Plus, I thought I needed to make tons of money to get started. I learned later that this was not the best approach.

Anjali Jariwala, a certified financial planner with Fit Advisors based in Los Angeles, says getting into the habit of putting money aside for retirement is crucial.

“Sometimes there can be this notion that you are selfish because you prioritize your needs over your child’s needs. And it’s not,” she says.

During the first year after having my son, I opened a savings account for him and started contributing to it, but I didn’t save anything for retirement. According to Jennifer Weber, CFP and vice president of Long Island, New York-based Weber Asset Management, this is a common mistake parents make.

“What I like to tell parents is that there are loans for college and school, but there are no loans for retirement,” Weber says.

Making sure my son had the best chance in life was important to me, but I didn’t think about what I might become if I didn’t save enough for retirement. Changing my mindset in this way helped minimize the guilt of prioritizing my financial future.

Weber, also a parent, says her job motivated her to increase her retirement savings.

“Working with many clients and hearing stories of caring for aging parents, I’m convinced that I don’t want to be a financial burden on my children when they grow up,” she says. “To avoid this, we really focus on saving and investing as much as possible. It’s not always easy because raising children is expensive, but we do our best and understand that the more we save now, the better off we will be in the future.

Weber suggests getting close to maxing out your retirement accounts or saving 10-15% of your income for retirement and saving any surplus you have for your children.

Consider a 529 account

When my son was born, my family and friends came to bring cash gifts, which went into his savings account. Well, most. I would have invested the money in a custodial brokerage account if I had known then what I know now. But I felt like cash was the safest option because I didn’t want to take any risks as a new parent. Yet cash is not king when it comes to long-term saving, because inflation is real.

Jariwala says many people lack knowledge about investing. However, new parents in particular tend to be more conservative and fearful about investing.

“They can keep all their cash savings, which is detrimental in the long run because you miss out [the] the time value of money and the makeup of your money,” she says.

If you have enough set aside for retirement, Weber recommends researching 529 plans and researching in-state options because you may be eligible for state tax deductions. She also says parents can start with automatic deductions from their paycheck to 529 so they don’t have to focus on contributing.

“I also like to tell parents that 529 plans are great,” she said. “Grandparents and other family members can offer [cash] instead of buying toys or clothes. They can send a link to their child’s 529 plan and ask family members to contribute to that plan.

Adopt passive investing

One of my first investment accounts was a brokerage account and I had no idea how to invest the money.

I bought the first stocks based on Warren Buffet’s advice about investing in things you use and understand, but I didn’t do the research.

Another strategy I used was to join an investment group on Facebook and buy whatever everyone said was hot. It wasn’t a brilliant strategy because I was basically guessing, not making informed investment decisions.

It probably would have been better to focus on passive investing using vehicles like ETFs to start with. Exchange-traded funds are a set of investments like stocks or bonds that allow you to invest in multiple securities at once. So you don’t have to worry about picking individual stocks when you go the ETF route.

Kaya Ladejobi, CFP of New York-based Earn Into Wealth, says stock picking isn’t for everyone, especially those just starting out who have less money to invest and haven’t done the research. . Otherwise, it turns into a game.

“There are a lot of details that go into making individual commitments this way – most of us don’t have the time. And then after that day job, we have job #2, which is parenting. So there’s no time to pick and check and monitor and monitor individual names for the average person,” she says.

For busy parents, Jariwala recommends investments like mutual funds, where professional fund managers buy stocks for you while building a diversified portfolio. These investments can also be presented in the form of target date funds, in which asset allocations are adjusted conservatively over a defined period.

“They will do all the work for you,” Jariwala says of target date funds. “So they will rebalance. They will become more conservative. All you have to do is choose the year of the fund, which is your retirement year, and everything works out on its own. There are also model wallets you can make.

Create an emergency fund

My first instinct was to throw all my money into investment accounts when I first heard about compound interest because I was so behind on saving for retirement and college my son. After creating a budget and calculating the many unforeseen expenses of parenthood, I realized that being cash poor was not the way to go. I needed an emergency fund, a reserve of money reserved for large and unexpected expenses. A good rule of thumb is to save three to six months of living expenses in your emergency fund.

Jariwala says that when saving and investing for the future as a parent, it’s essential to plan for living expenses, whether it’s after-care, after-school activities or new clothes.

“When we had our daughter, we had a really big expense because we had a full-time nanny and I always thought, ‘Oh, okay, well, when she’s in school, we we will not have nanny fees. Costs will go down, but one cost is usually traded for another cost,” she says.

Be strategic about how you invest

When I first started investing, I put all my money into a 401(k), not realizing that other investment tools might be more tax efficient, like a Roth IRA.

Jariwala suggests using a particular order to invest. She says parents should contribute enough to their 401(k) to get the company match, then fund and maximize a Roth IRA (if possible), and finally, start maximizing their 401(k) again if they want. rest of the money.

“Once you have money beyond that, that’s when you want to start thinking, ‘What other goals do I have in my life that I want to fund? ‘ “, she says.

I’m not in a position to fund any other goals yet, but at least I have a strategy to follow and I know it will benefit both my son and me in the future.

Ladejobi, a mother, sums up perfectly why it is necessary to prioritize retirement as a parent.

“Often this helps parents understand that they need to put on their own mask first and save for their own retirement, because ultimately it’s a gift for their children.”

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