Parents want what is best for their children, and watching them struggle financially is not easy. However, financially supporting your children for longer than initially anticipated could cause a delay in your retirement and, in some cases, create an unhealthy financial dependence. It is never too early to understand the impact that helping your adult children can have on your retirement and financial goals. There is no one-size fits all plan to keep you and your children on track financially; this blog will outline steps you and your children can take to stay on track.
The COVID-19 pandemic forced financially strapped adult children to move back into their parents’ homes and rely on them for financial support longer than planned. By July 2022, one-half of adults aged 18 to 29 lived with one or both of their parents. While this number is down from the peak of 52% in June 2020, it is still significantly higher than even two years prior when in 2020 only 38% of adult children lived at home.
There are a variety of reasons why this trend has occurred. Low starting salaries, high student debt, and skyrocketing housing prices are some of the reasons we see higher rates of adult children living with their parents. Changes in sentiment about adult children living at home means there’s less stigma associated with the lifestyle. It has become commonplace for adult children to bridge the time between college and starting their first job or an advanced degree. Others like having their parents there for emotional support as they begin their careers.
With one-half of adult children living with their parents, you may think those parents can all afford to help their children. While it’s true that those with the highest incomes have double the rate of households supporting adult children than those with the lowest incomes, it’s those in the middle-income range that offer support most frequently.
While only 6% of households in the highest income range support their adult children, 20% of those making $54,916 to $88,392 and $135,693 to $416,293 do. Close behind, 19% of parents earning $32,706 to $54,915 support their adult children. The reality is that many parents are causing harm to their financial independence by helping their children.
A recent survey by Northwest Mutual found that 1 in 3 baby boomers have less than $25,000 in retirement savings. Another study by GoBankingRates found that only 23% of Americans over age 55 have $300,000 or more in retirement savings. One of the main reasons baby boomers gave for not saving enough in retirement was providing financial assistance to adult children. Some parents even take money out of their retirement fund to help their children and deplete the account.
According to a Merrill Lynch study, 82% of parents say they are willing to make a major financial sacrifice for their adult child. When asked how they would make this financial support, half were willing to draw down savings, while 43% were willing to curtail their lifestyles. Taking that a step further, 25% of parents say they are willing to take on debt and pull money from retirement accounts.
According to a Merrill Lynch and Age Wave Study, this willingness to provide financial support culminates in over $500 billion annually. That is a staggering amount and is twice as much as the $250 billion on average that parents invest in their retirement accounts. You should avoid taking money from your retirement or reducing your contribution to help your children. Your financial freedom in retirement should be a focus, and helping could cause irreparable harm to your financial independence.
An excellent first step for parents is to set up a meeting with a financial advisor to determine how much assistance they can offer their children. An advisor will assess your income and expenses and determine if you are on track for your retirement goals using a cash flow projection. This exercise can give clients a clearer picture of how supporting their children is affecting their own retirement goals. It can also help set a timeline for how much assistance you will offer and how long you can provide it. A financial advisor can give you options and walk you through the best way to provide support without affecting your retirement goals. This assessment will be ongoing and must be updated when your situation changes.
Most of the financial support parents give is not for emergencies. Instead, the support is typically for day-to-day expenses, including rent, mobile phone bills, and other utilities. Only 25% of the financial support goes toward paying college loans. Parents often also help pay off debts associated with credit cards, medical expenses, and car loans. On average, parents give children about $1,000 per month.
Teaching your child to live within their means can be an excellent step towards creating financial independence. If they are misusing the money you give them, it may be time for them to learn the consequences. Bailing them out when they make poor decisions will not teach them anything and most likely cause the problems to occur again. There is a difference between helping them in crisis and bailing them out because they gambled away their rent money. Getting their finances in order will get them on a path where they will no longer rely on you for support.
To help set boundaries, consider making a plan that outlines what financial support you will give. Will you allow your adult child to live in the house for free? Will they pay you rent? Will you be covering student loan payments? These are all critical questions and should be part of the plan. You can also determine during this time how you will be offering support. Will the support be a one-time gift, a loan, ongoing support, or will you pay specific bills for them? You could even draft a contract, so both parties are obligated to fulfill their end. The cash flow may help answer these questions and give you a clearer picture of what support you can offer.
You and your adult child must agree on a timeline to ensure you both know how long the support will last. Will you support them until a certain age, after you have given them a specific dollar amount, or will the support gradually decrease? Answering these questions will help to set expectations.
While you are financially supporting your children, give them more responsibility. Requiring your child to contribute to household items such as groceries or utilities can help them budget and understand how to utilize their own money. Be a coach and a resource for your children regarding their finances. Start with reviewing their budget and determine how they are spending their money and how the financial issues have occurred. This exercise can be valuable in helping your child understand how they got into trouble in the first place. They may find they are spending a lot more on entertainment or other discretionary items they could cut out to save money. If they have student loans, walk them through the monthly payments they can expect. If they are hesitant to create a budget, this could be a prerequisite to helping them. Help them understand the stock market, 401(k), and debt management. This knowledge can be valuable in setting them up on a path that does not require your assistance in the future.
If you are comfortable, bring your adult children to a meeting with your financial advisor. Your children can be walked through the numbers, ask questions, and understand the impact of your continuing to support them. This would also be an opportunity for your child to learn more and ask questions they may have about their finances. It is never too early to start saving, and working with an advisor and having a trusted contact can immensely help as they progress in their career.
Be open and honest with your children regarding how providing support will affect your financial future. If you go through the process and, in the end, find that continuing to help your child will be a detriment to your retirement, be honest with them about it. Let them know your financial advisor’s findings and how much, if any, assistance you can give them. Explain to your adult child that helping them now could mean you will need help in your later years. They may have to pitch in and help with your expenses later in life if you continue to support them now. You may think you can continue to work and support yourself in retirement, but that may not be the case. You could become ill or incapacitated and spend down your retirement assets. At that point, your care costs would fall on your children.
If your child is not receptive to the support, bring them to the meeting with your financial advisor so they can help with the explanations and advice. If they are still not receptive and you cannot support them, you may need to take another approach. Continuing to support them may even cause them to be less motivated to seek financial independence. The children may have become too comfortable living with their parents, who are paying their expenses and cooking meals for them. They might not consider leaving because it is easier to stay and have financial support from their parents. Charging rent and establishing house rules could make the children less likely to remain in the home. Be patient and stick to the plan for financial freedom for both parties.
If you still financially support your adult children and have never explored the impact that support has on your retirement goals, you could find yourself in trouble when it comes time for retirement. Make an appointment with a financial advisor to review your plans and goals to determine if you are on track to fund your retirement. Consider how you would like to live during retirement. Determine the amount of support that you will be able to offer your children going through a cash flow projection. Sit down with your adult children, walk through their budget, and help them where you can so they stick to it. Create a plan, set a timeline, and help your child achieve financial independence. Be open and honest with your child about the impact of helping them. Your retirement and goals are the most important and should come before helping your adult children.
Author: Matt Jaspert, CFP® | Financial Planning Analyst | Allegheny Financial Group | October 2022
The information included herein was obtained from sources which we believe reliable.
Allegheny Financial Group is a Registered Investment Advisor. Securities offered through Allegheny Investments, LTD, a registered Broker/Dealer. Member FINRA/SIPC.