Congratulations! After years of hard work your child has just received their college diploma. You are breathing a sigh of relief as you are off the hook for all of those years of tuition payments. Hopefully your child is also in the process of securing a full time job and coming off the family payroll for good. As you move into this next phase of life there are several things you should do to take advantage of this transition:
1. Review your tax withholdings:
If your child graduated in May and is starting a full time job, it’s likely you will no longer be able to claim them as a dependent on your tax return this year. This is a loss of $4k in exemptions ($8k if you have twins!). You should review your current income tax situation with your CPA or financial advisor. Additional pre-tax contributions to your retirement accounts may offset some of this tax impact, but if you are already maxing your contributions, then an adjustment may be necessary to avoid a tax surprise next April.
2. Help your child start their career on the right foot:
The life of a new college graduate is very exciting. Education has opened the door to a world of possibility. While their starting salary may not seem high, the money choices they make now will have lasting effects. Investors in this demographic have the most powerful tool on their side: time. Help your child sort through their employee benefits package and begin contributions to their retirement account. We have met with many of our clients adult children in this phase of their life. A gift of an hour or two with a financial planner may be all it takes to help them decide how much to defer to their retirement accounts, live within their means, and feel in control of their financial future.
3. Consider an investment in their future instead of monetary or tangible gifts:
Upon graduation it is customary to give gifts. Typically these range from cash to cars, trips, or in extravagant cases maybe even a house or condo. While any gift is generous, you might consider rewarding your child’s hard work with contributions to a Roth IRA. These are a great tool as most starting salaries will fall within eligibility for making full contributions and contributions can be withdrawn at any time tax and penalty free. These make the accounts extremely flexible for young people as they can withdraw their contributions in a few years for a first home purchase or allow them to grow completely tax free for retirement or other future needs. Of course before giving a significant gift you should read tip # 4 to make sure it won’t jeopardize your retirement.
4. Take a look at your retirement picture:
Now is a great time to revisit your long term goals and determine where you stand. You may have had to put off or decrease your retirement contributions to pay for college expenses. Don’t let that extra cash go straight to new expenses or start building in your bank account! This is a unique opportunity to start paying yourself first.
5. Ramp up retirement savings:
If you are not maxing contributions to your 401k, now is the perfect time to start. If you are over age 50 you are also eligible to make catch up contributions. These are a great way to get yourself back on track for your goals and boost your retirement income.
6. Review your estate picture:
Now that your child is no longer a minor you should review any trust provisions you have in place and consider if they are still warranted or if you should change any of your beneficiary designations. Your child may or may not be mature enough now to inherit funds outright. This is something to consider. Estate goals are also very situation specific, so you should consult with your financial planner and attorney before making any changes.
7. Review your Life Insurance Coverage:
When you were supporting young children and had many working years ahead of you the need for life insurance was likely great. Hopefully you have been building net worth over the course of your career in preparation for retirement. Now that your children are off the family payroll it’s likely that your need for life insurance has declined. Depending on the cost of coverage it may make sense to trim some life insurance.
Depending on your personal situation there may be more considerations to take into account after the graduation parties are over. We recommend discussing these issues with a fee only financial advisor to make the best decisions for you.
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