Are You Sacrificing Your Retirement for Your Adult Kids?

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Based on statistics, you are! A whopping 63 percent of parents have actually sacrificed their financial security for the benefit of their children, while 72 percent say they’ve put their children’s interests ahead of their financial retirement needs. What does that look like in dollars? Parents contribute $500 billion to adult children annually - half of what they contribute to their own retirement accounts!

Where Do the Dollars Go?

According to a June 2018 survey conducted by Merrill Lynch and Age Wave, 79 percent of parents provide their young adult children with some sort of financial support. Surprisingly, the typical scenario isn’t one in which parents provide temporary financial support to a financially responsible child facing an emergency situation. The norm is that parents are helping adult children to the point where they, once again, become financially dependent on their parents.

Here’s how the financial parental support breaks down by category:  

  • 60% - food/groceries
  • 54% - cell phone
  • 47% - car expenses
  • 44% - education
  • 44% - vacations
  • 36% - rent/mortgage
  • 27% - student loans

Not only are parents enabling their young adults to become financially dependent, they are putting their own financial security at risk. The survey found that 50 percent of parents pull money from a savings account, 43 percent live a less-comfortable lifestyle, 26 percent take on debt, and 19 percent delay retirement to meet the needs of their young adults. It’s a lose-lose situation for everyone.

In addition, some parents also have a “boomerang” child—one that returned home to live with them. Based on a Pew Research report, about 15 percent of today’s young adults age 25 to 35 live with their parents. That amount is five percentage points higher than the number of Generation Xers (those born 1965 to 1976) who lived at home when they were in that age group.

Help Yourself First

If you’ve been an airline passenger, you’ve heard flight attendants tell you to secure your oxygen mask first, and then tend to your child’s mask. The same philosophy applies to your money. You need to be financially secure before helping others—even your children.

As a general guideline, don’t provide financial assistance to your adult children if:

  • Your emergency fund contains less than three to six months of living expenses.
  • You are accumulating debt through outstanding credit card balances, loans against your 401(k) or life insurance policies.
  • You haven’t saved enough money for your retirement.
  • You are underemployed, unemployed, or at risk of becoming unemployed.

Helping your Children Achieve Financial Independence

Consistently providing your children with money every time they ask for it isn’t a good strategy. Instead, provide them with solid financial education. Teach them how to research their financial decisions and how to budget. Help them get on track for finding solutions to their current short-term money problems and for developing a financial plan for their long-term goals. 

Guidance and discipline are even more important to those adult children with chronic money problems. If a child always needs financial assistance, what happens when the parent’s resources are exhausted or he/she passes away? Better to get them on a solid financial foundation earlier rather than later.

If your child needs additional help or an incentive for managing his or her finances, define the terms of your agreement and sign a contract. For instance, if you lend your child money, charge a small interest rate and establish reasonable monthly payments until the debt is paid in full.

If an adult child has moved back into your home, you’ll need to put guidelines in writing as well. For instance, will the child pay rent and how much? What chores are his or her responsibilities? What are the house rules for curfew, guests, etc.?  If your child is a parent, how often will you babysit?

Summary

No one likes to see their child suffer, but you, as the parent, shouldn’t suffer either. Providing financial support to children requires good communication. Let your children know how much you can comfortably afford to give them and set firm boundaries when you reach your giving limit. It’s natural to want to protect your children’s financial future, but it’s crucial to protect your own!

Meredith Carbrey, CFP, is a Senior Wealth Advisor with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website or email Meredith.

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