Navigating College Education Costs and Boomerang Kids & the Financial Realities for Parents | Ask My Man Manny Podcast

Can we really redefine success for young adults beyond the age of 18? Join us as Dr. Abby Durkin and financial advisor Manny Henson tackle this critical question alongside us. Together, we explore the emotional and financial struggles families face when young adults transition to college or the workforce. With rising tuition costs and mounting student loans, the norm of achieving independence at 18 is increasingly under scrutiny. Dr. Durkin challenges outdated cultural expectations, highlighting the emotional toll on both parents and children, and the importance of fostering resilience and financial literacy for a smoother transition.

Ever wondered how to manage the return of adult children to the family home without compromising their journey towards independence? This episode is packed with practical strategies from Manny Henson, who shares expert insights on how families can establish new household rules and navigate the complexities of today's economic landscape. We delve into the importance of open communication, setting boundaries, and adapting parenting approaches to support young adults as they carve out their new roles and responsibilities. The goal? To maintain healthy family dynamics while empowering our children to thrive.

Financial preparedness is a cornerstone of the discussion, as we dissect the nuances of college finances and investment strategies. We address the evolving job market, the significance of making strategic educational decisions, and the critical need for realistic financial planning. Our conversation wraps up with an extensive guide to maximizing 401k investments, providing tips on avoiding tax penalties, and maintaining a balanced investment approach. Remember, the advice shared is educational, not personalized, so always consider consulting a professional for your specific financial situation. This episode is a treasure trove of wisdom for navigating the financial and emotional journey of guiding young adults to independence.

Chapters

• 0:07 Financial Independence and Emotional Support
• 5:15 Navigating Financial Independence With Adult Children
• 14:39 College Finances and Investment Strategies
• 23:56 Maximizing 401k Investment Strategies
• 31:07 Financial Education Disclaimer

Transcript

Speaker 1: 0:07

So part of setting rules is also about encouraging independence. It's not saying you're the bad guy, mom and dad, if you are saying, hey, you need to chip in financially. It's a different financial literacy conversation where now might be a great time to sit down and open up the family budget to that 18, 19 year old and say this is, this is what we've got purely intended to be general and educational in nature and should not be construed as specifically tailored investment, financial planning, tax, legal, psychological diagnosis or other professional advice.

Speaker 3: 0:54

And we are back for another episode of Ask my man, manny, with our guest host, dr Abby Durkin and Manny Henson, cfpp, and I'm the founder and president of gamma wealth management and so, in our conversation today, given that it's time for a lot of kids to move in to their dorms or, if you're you like me, you have some elementary school kids or high school kids, you're thinking about them getting back in the swing of things, but this could be a challenging time for some people and, abby, I understand you have some things you wanted to talk about, some things that kind of came to mind. What do you think about this point in time this year and the emotions and things that are running high at this point in time of the year?

Speaker 1: 1:39

Yeah. So it's super emotional, you know, for seniors especially that might be going to college for the first time away from home, there can be numerous financial conflicts outside of just having an out of state tuition looming. If that's the school of choice or that's the dream school, out of state tuition is just incredible these days and it's very rare that people can afford that without any financial assistance. And so what one trend is that's been predominant is families choosing to save money by foregoing the dorm experience and foregoing that traditional what used to be, I guess, a traditional college experience of kids leaving home at 18. You know, you pack them up in a station wagon and send them multiple states away. All of that has changed drastically and part of it is because tuition and you know we have talked a little bit on the podcast previously about just the overall burden of student loans and the impact that that is having on families altogether, but this podcast goes into kind of a little bit of a different direction. So, in addition to kids staying home for financial reasons because of tuition, I was looking up some research and, according to the Pew Research Center, more than half of Americans age 18 to 29 were living with their parents as of July 2020. And that was right when COVID happened. So that statistic can't be perfectly attributed to COVID, and this article was published June 17th of this year of 2024. So that means it's double the record levels. So in the past it was only about 26% in the 1960s and that's steadily risen over the past decades.

Speaker 1: 3:38

And there's a lot of reasons, most of which are financial, why some adult kids never leave their family or they return home after a really long period of time. So, emotionally, you know, as a psychologist, what's a parent to do. You know, one common reaction that I've seen in my practice is both the parent and the kid feel like failures, and part of that is because of culturally set milestone, that there is this expectation that once you go into college, that you're an independent adult, boom happens, you turn 18 out, and some people really use that as a yardstick of parenting success, and kids, too, use that as a yardstick of success for themselves. So I think what's really important is to remove that cultural mindset that this is a norm that everybody has to follow, that we're all kind of working off of the same playbook, which is simply not the case anymore. It's not financially feasible and it has nothing to do with a person's given success as a parent, their parenting strategies, and it certainly doesn't mean that the kid themselves is a failure. It means that the financial landscape over this period of time has changed drastically.

Speaker 1: 5:07

Over this period of time has changed drastically and a lot of big feelings can be avoided if you first address this idea that somebody has failed. So that's number one Doesn't mean you failed. Second is if this is something that is happening in your family and maybe it was unexpected, because maybe both the parents and the kid had been excited about them leaving home and that's not the case, you have to manage that disappointment. You have to talk about what that means. And then how are you going to reshape your parenting approach and your parenting style to really foster that sense of independence and to say, hey, this is not our fault. This is a really rocky time financially for the family. This is a difficult time economically. Whatever the reason might be, it's not your fault.

Speaker 1: 5:59

But moving the paradigm from you're a kid to now you're a young adult and what that means and that can come with a lot of challenges too, because you know I'm a mom and I'll be the first to admit that it's a bit difficult to let go of the idea that you know my son is an adult now. You know that he's no longer the squirmy elementary school kid or he's no longer the cuddly toddler. He's a young adult, he's making his own decisions. But that means having those financial literacy conversations. So part of setting rules is also about encouraging independence. It's not saying you're the bad guy, mom and dad, if you are saying, hey, you need to chip in financially. It's a different financial literacy conversation where now might be a great time to sit down and open up the family budget to that 18, 19 year old and say this is what we've got. They know this is our mortgage, this is our cell phone, this is our internet, these are utilities, this is groceries, this is the entertainment fund and we'd like you to chip in in some way for that. So you can develop rules of what you think and what the kid thinks they can actually do to contribute to the house. Responsibilities can change so that they are starting to really pull more of their weight and they participate more like an adult in the home and really give mom and dad a break on that. So if they can't you know, for academic reasons sustain employment, there are other ways that they can feel efficacious and there are other ways that they can feel independent and like they're really being treated like an adult. That's more than money. I think the bottom line is that when they do eventually leave home, you can use this extended time period with them to teach them a lot about family finances and to let them know that the cultural norms that maybe were in place 20, 30 years ago, those aren't really the norms anymore, and that's okay. And to maintain that sense of flexibility is really really important. So this also can happen even after kids have gone away and you think, oh, I've launched them. You know, I'm a bird launcher.

Speaker 1: 8:49

They are successfully out and they're on their own, and then calamity strikes. Maybe the kid gets laid off, they lose their home, something happens, and then they have to come back as an adult, and that can also be a really awkward time because it has to do with this big idea of roles. They don't want to be seen as a child, for sure. They want to be seen as an adult, but part of the financial stress that can come with. That is, how do you manage your social life right, because by this time, potentially, mom and dad, or whoever are the guardians, have stepped into their new identity as empty nesters and they have different social obligations and interests and hobbies that they're pursuing.

Speaker 1: 9:34

It doesn't mean that you give all of that up just to facilitate a homey environment for the adult child that has moved back home. The other prickly area is if your child has moved back and they're not really contributing financially and they're going out all the time. So if they're just parasitic, if they're eating you out of house and home, they're gobbling up cell phone bill, they're not really contributing and they're going out. You know, that's kind of a nightmare scenario, but that is just one scenario and that's definitely something that can be worked through and talked through in a calm way. So since a lot of this has to do with finances, manny, I was wondering if, in your practice, if you've seen a trend like this and what advice you've given people in this situation.

Speaker 3: 10:25

You know it's been a tough time for a lot of kids over the last 20 years. The rule was you get good grades, you get decent grades, you go to college, you got out of college, you got a job. You didn't have to really worry about that much and as long as you did the work, you studied what you wanted to do and you did a good job doing it. Things would just iron out in the end and maybe you didn't use your degree, which you wanted to use it in, but you would find some type of employment just through networking and you'd have that independence by virtue of where the employment market was. And that has changed dramatically. You know I laugh because I feel like I came into college at just the best time, because I feel like I came into college at just the best time and the last time they became affordable, especially from a public school education standpoint, public higher school education standpoint, because I went in, got out on time and the debt burden was not very substantial, Even for your community college or your state school that you're in. Parents and families are going to be making a huge long-term commitment and unfortunately there's so much more emotions that come to this and I can easily tell you hey, the best thing to do is long-term savings time money analysis, right Time value money. I can forecast how much money your infant might need, based on inflation and higher education, and every couple of weeks you could put money in a 529. But at the end of the day, when it comes to that late stage planning, emotions are high. People are not looking at stickers, they're not looking at the fundamentals, they're looking at all right, what do I want to do? And we'll figure out the money afterwards.

Speaker 3: 12:15

And a lot of times, if people do come to me and they're honest enough to know that they have a problem and they come to me, what they typically do is they want me to validate the decisions that they've already made. And I find this a lot happens with home ownership as well. It's just one of these things that we this last thing that we've initially ingrained to ourselves, our identity, that we can't separate it. And not everyone I mean some people are just like all right, I'm going to just go to community colleges for two years and then I'm going to go to the school I want to do, or I know that a master's is my master's. A graduate level work is probably where I want to spend the most of my money in. So I'll go to an undergrad, get an undergrad degree in a school that's affordable, that's within my parents' budget, and then I'll go somewhere else.

Speaker 3: 12:59

I see emails from colleges now in my daughter's inbox, my inbox. They get CC to me and it's like they're selling you on all the glossy parts of college life the hanging out with friends and the direct room and the food and the cafeteria and being independent. It's not okay. Here's what US News says is our ROI for this degree program. Now I do have some software that goes very, very deep in the weeds with working backwards.

Speaker 3: 13:34

I can, you can tell me your kids reading and mathematics, sat scores, your budget, what you have in your, your 529s in the late standing play phase with degree programs, that they, they want to go to their class rank, and I could tell you, all right, what is their probability of getting some funding across all these different schools, and you might be surprised.

Speaker 3: 13:53

All right, what is their probability of getting some funding across all these different schools and you might be surprised. Maybe Hopkins is a little bit less expensive than a state school because of where your income is and your class rank for your child is, and so what most people don't do is look at the fine details is look at the fine details. But if they found the fine details, they can realize that two educations at even the same school aren't paid for the same way, they don't cost the same amount, and if they did their research a lot of times, they can get what they want to accomplish. If they do it strategically, oftentimes it's at the end of the day it's like all right, here's what I want to do. My friends are going here. I really like this place. I want to get away.

Speaker 1: 14:38

And then the numbers kind of come after the fact and that's the reality of it. One thing that really surprised me when my son went to college was when I went to college it was, you know, 2001, 1998, 2001 period and I did the FAFSA and the University of Colorado. And I did the FAFSA and the University of Colorado. They took that into account, with the estimated family contribution, and they adjusted the tuition to that, and that was helpful. I still had to do a work study program, I still had to get a job while I was in school full-time, but they took that quite seriously. Well, in 2000, when my son graduated high school, we did the FAFSA and our estimated family contribution was what it was. And then the school that he ended up going to said, well, that's nice, but we don't care. They did not adjust the tuition one penny for that EFC, the tuition one penny for that EFC. So it was like, well, what's the point of even doing the FAFSA if they don't care about the estimated family contribution? And their answer, of course, is well, take out student loans.

Speaker 1: 15:43

And so schools have been, I think, disincentivized to honor estimated family contributions because it's and I hate to be so jaded, but it's a business, you know, and you're talking about the sales aspect that your daughter and you are getting in your inbox, I got the same thing.

Speaker 1: 16:01

You know they're selling you something and they're not being transparent about what it's actually going to look like and how much they're going to take in the estimated family contribution into account, and so it's really critical to have these conversations about finances and contingency plans, and so, like, one contingency plan that I've made with my son, for example, is you know, I live abroad and so I am setting up a home so that, if something changes drastically, he has a place to come. And we were setting up like a separate, like alternate reality. You know, if, hey, plan A, b and C doesn't work out, plan D is pretty, pretty spectacular. Plan D is pretty great and there's no shame in it, and you have something to look forward to, no matter what. But that's a conversation that we've been having since he was 18. And he's 20 now, so none of this is a surprise. Luckily, he's doing okay, but we are now prepared as a family in case that's not the case.

Speaker 3: 17:07

Yeah, and another thing is I'm hearing with this new and this really happened after the great resignation is with this new employment market, employers are saying that skills and experiences trump everything. They're trying to poach each other's employees, and the ability to get entry-level positions as a graduate is at its lowest probability that there's ever been. Positions as a graduate is at its lowest probability that there's ever been, and so you want to have that hurdle rate, which is your loan that you're carrying, be the lowest you possibly can, so that you can have one after you meet your expenses and your living expenses. Your life you can actually enjoy, have fun with all the hard work you do at your job, but then you can also compete for jobs that are going to give you the experience that you have. Unfortunately, wages aren't coming up, wages have not grown substantially none of the inflation and so you want to think about that, not only in the moment when you're in college. All right, I want to, of course, finish, I want to be able to pay the bill, but how do you position yourself from a balance sheet standpoint in a way that makes you gainfully employed in the place you want to be?

Speaker 3: 18:21

And so the rule of thumb is for the first year salary that you can anticipate in your degree. You should not be coming out of college with more than that amount of debt. So let's say you are going to be in a mutual fund account and you want to work in an investment company. Your starting salary is $65,000. You should not be walking out of college with over $65,000 in debt. Now, obviously, you would want to have a lot less than that, because the reality is that money is still growing, whether you make that payment after six months, you graduate. You got your job. The clock is ticking. You got to pay that down and I've seen so many people unfortunately move sideways. They pay too much for a degree program that wasn't economically viable and they're making their minimum payments on their student loans in 10, 15, 20 years go by and they have the same exact balance than they did when they graduated. And so you got to look at everything. And then nowadays you get your undergrad and then you can work. You want to realize, you want to figure out whether or not you actually like doing what you want to do.

Speaker 3: 19:29

So many of us go through an undergrad degree program. They realize, oh, I kind of like this, and they get their first job and they realize the commute where are they going to go? Their boss, the industry where you know their company is heading, is not the place where they want to be. Now you know you have this huge debt or maybe there's another career that you can pivot to, and then that means going to get your graduate degree. But if you're overextended for your undergrad or you don't have that flexibility from making sure you had the earnings capacity above what you have to pay out on your month-to-month bills, then that may mean that your graduate degree program that pivot moment when you do have experience, when you're coming out of that graduate degree with experience and in a better position that might not even be available to you. So you want to look at it in multiple stages. When you're looking at your education, of wishful thinking.

Speaker 1: 20:19

It's a matter of being reality-based, that these changes, these transitions, disillusionment, as well as just general experiential learning that we go through that says, oh my gosh, I don't want to go to medical school, I want to do this instead, normalize that. But it does come with a financial cost and I think we actually had a submission that asked a pretty good question about that. Long-term investments and stuff.

Speaker 4: 20:56

Hi, I'm in a pickle and I don't even like pickles Looking for some long-term investing strategies to consider. I have a traditional 401k and I recently started a new job that I'm funding aggressively. Would it make sense to roll in a previous or start fresh? If starting fresh, how can I diversify my account for higher risk, higher reward through self-management and low maintenance? Thanks in advance, ms Dill.

Speaker 3: 21:26

So I'm going to go very, very fast through this, because we only have like seven. You know a couple more minutes and feel free, if you're listening, to stop and pause and rewind at some point. People are reaching out to me to get some clarification. When you think about a 401k, one thing you want to kind of consider is it's yours. All the dollars you put in are yours. There's going to be a vesting period, are yours? There's going to be a vesting period. And once you decide to leave, what your employer has decided to give you is available for you to either roll over and, in some cases, keep there forever. So if you have over $5,000 or more, you are not obligated to do anything. So don't let anybody rush you. You might get messages from another company that give you a rollover recommendation, maybe sometimes in the higher cost products. Take your time, think about it. There's no rush. If you have $5,000 or more, they cannot force you out. You're not required to take money out until your RMD age, and that's 72 to 75, depending on what age group you're in. That's 72 to 75, depending on what age group you're in. So that's the first thing. You have time.

Speaker 3: 22:31

Also, there's a comparison that you want to make and that's where you're looking at cost. Cost is the number one, a very key connection. It has a really strong connection with overall performance. We found that, based on history, it's shown that the higher costs you pay for your investments, the lower your after-cost returns will be. When you're working with an employer, your employer is negotiating with all the active participants to bring that cost down. The bigger the employer you are, the more assets are in the 401k. The more bargaining power you have, the lower your internal costs are. The more bargaining power you have, the lower your internal costs are. So, generally speaking, the bigger the two firms you're going from into is usually the one that has a better deal when it comes to expenses. But that's not always assumed. When you leave an employer, it may have a different term, different terms for those who are no longer active participants. Your fees might go up if you're no longer working with the company who sponsored the 401k and in that case you want to do the comparison. Which ones are at lower cost? Which ones are doing the best job for you? Morningstar, there's some independent resources there, independent rating agencies that rate the investments. They can give you an idea, giving an apples to apples comparison, and so that's the second one.

Speaker 3: 23:56

The other part is clerical. If you had a loan, sometimes they might allow you to pay down your loan If you had a 401k. Unfortunately, a lot of people have done this over the years. If you make a rollover it might trigger a quicker payback period, whereas you might be able to pay from sending them a check to pay down that loan where it's on. New 401ks might be able to pay off their loan and transfer your loan to the new plan. That could be an option.

Speaker 3: 24:18

So you want to make sure that you're not triggering anything else that could tax catch you. From a tax standpoint, if you pull money out of a 401k, you have a loan and it defaults that's taxed and possibly penalized if you're under the age of 59 and a half. So let's say, for example, you feel like this money that you have in your plan, the old plan, doesn't really make much sense to you. The new plan seems better, has better cost structure, better investment options. You want to see it better. You like the idea of having all your money in one bucket because you can manage your asset allocation, instead of having two buckets of money with all these dozens of funds and trying to figure out where they all are across multiple buckets. You can have everything in one bucket. One approach is to look at equity funds. There's advice that's given to you, oftentimes by the financial planning sponsor of the plan. They can give you a list of all their funds.

Speaker 3: 25:14

I would not recommend chasing performance Over a seven to 10 year period of time. The economy changes and it looks better if you look at the end of the top of the mark towards the top of the market to buy those very aggressive, heavy, high, fast growing things, and that's usually the worst time to buy them. So, leading into 2010, the S&P 500, for example, was pretty much flat for an entire decade, but if you invested in 2007, that would have been probably one of the better times to invest because things didn't look good. So usually chasing performance based on and associating high performance with high returns at the overall top of the overall market is a signal in my head that you're probably chasing performance. You don't want to do that, but if you have a long period of time, investing in a broad approach of high risk, moderate risk, low risk and then looking at rebalancing consistently is a steady way to go.

Speaker 3: 26:20

Your company dictates which funds you can invest in. With some exceptions, some companies have gotten the ability to be a little bit more sophisticated. They might allow you to open up what's called a brokerage window, where you can own funds that are not within a pre-approved list, so anything that trades in the open market. You tend to have a higher cost structure for trades than that, but if you're buying and you're holding and you're looking at investing and you have the time to do it, then that might be an approach to get style purity. I'm a big advocate of style purity, which means if you can invest in a fund that has a narrow mandate, rather than a bunch of funds that have multiple Years ago, people were getting dumped in what's called target date series of funds and that made a lot of sense for newer people or younger people who maybe didn't really have a lot of money.

Speaker 3: 27:13

They were growing their money over a long period of time and they really didn't have enough acumen and interest in divvying up the funds. Now there's no transaction fees. There's no minimum. With the funds that you have in your 401k, instead of having a fund of bond funds and stock funds, you can own those direct areas, those funds that focus on those particular areas large, mid-sized, small-sized companies, fixed income, different variations of that and then there's an automatic rebalancing tool, so you don't have to worry about how are we going to rebalance this. The system will do that, and this is oftentimes for free, so all of that's kind of built in the structure of a 401k. So, in my opinion, I don't believe a fund and funds makes much sense to most people nowadays, given that you can do pretty much 95% of what you can and have a little bit more clarity and control over your risk.

Speaker 3: 28:10

In which you're invested in over a target date fund or fund out funds, there are some level of maintenance you want to do at least every six months to a year. You want to evaluate whether or not you've how you have, how close you've achieved your goals, whether or not you can scale back risk, whether or not investments have grown, and you want to capture those returns and iron out the bubbles in your portfolio. If that doesn't that isn't done by automatic rebalancing you want to go in and you want to check it yourself. And then there's certainly some second advice, second opinions, that we can offer If you have an interest in expanding what your options are that you have between both plans and you're willing to deal with the complexity of working with someone to address some of the needs that may not be addressed within your lineup. Talking to us might be an option as well. So we have the ability to work with clients who have a dual mandate of having some sophistication managing their 401ks while their money's in their 401k that's even possible or rolling it over and then having professional management on the money that they roll over.

Speaker 3: 29:16

So I said a lot there. I want to thank everybody for listening. This was a great conversation. Don't forget to look at the numbers. When it comes to your education. It's an investment. You can also have fun with it as well, but you have a lot more fun with it when, in the end of your time, you realize that you did it cost effectively, and I want to give Abby a moment to say anything else you might have on her mind.

Speaker 1: 29:42

Yeah, thank you so much, manny. I always learn something from you when you talk. I would encourage, as parents especially are having these conversations, that they don't hesitate to bring their adult children into the consultation with you. So if you're thinking about the questions like we just got for the submission, about rolling over 401ks and long-term investments, bring your adult children, because chances are, everybody know, everybody says, oh, I wish I would have learned this in school, or why don't they teach this in school? Or, you know, I've never had to use the things that I learned in high school in practical life.

Speaker 1: 30:18

Well, this is like life school. So every conversation with Manny is a financial class at the graduate level. So I would recommend that if you're a parent and your kid hasn't left home for any of those reasons or has returned home, this is gonna impact you financially and I think it should be a family conversation. So I hope I didn't overstep with that, manny. I would really love to see more kids, more adult children, in that consultation room with you and learning alongside their parents. But that's all from me, thank you.

Speaker 3: 30:51

Absolutely. And again, thank you all for joining us, listening to us, giving us a moment in your space, virtually, and if you ever need anything from us, we're here to help. Take care.

Speaker 2: 31:07

The content presented and discussed is purely intended to be general and educational in nature and should not be construed as specifically tailored investment, financial planning, tax, legal, psychological diagnosis or other professional advice. Any data cited is valid as of the date of presentation, but please know that such data are frequently subject to change. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained in this course should be construed as an offer to sell, a solicitation of an offer to buy or a recommendation of any security or other financial product or investment strategy. All investment tax and financial planning strategies involve risk that you should be prepared to bear. Investment, financial planning, tax, legal and other professional advice is specific to each individual and entity.