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 unhealthy financial dependence. It is not too early to understand the impact that helping your adult children can have on your retirement and financial goals. There is not a one-size-fits-all plan to keep you and your children on track financially; this article will outline steps you and your children can take to help stay on track.
Why Are Adult Children Living At Home Longer?
The U.S Census Bureau estimated that 58.8% of men and 56.4% of women between the ages of 18 – 24 live in their parent’s home. Additionally, 19.2% of men and 13.6% of women between the ages of 25 – 34 are living in their parent’s home. There are a variety of reasons why this trend has occurred. Low starting salaries, high student debt, inflation, 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.
How Often Are Parents Pitching In Financially?
With 1 in 3 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 economic analysis found that 52.5% of peak boomers have assets of $250,000 or less and will rely primarily on Social Security as their main source of income. 14.6% of peak boomers have assets of $500,000 or less and most likely will also strain to meet their financial needs. Based on these figures, two-thirds of peak boomers will be financially challenged in retirement. Adding in the funding uncertainties with Social Security, relying on Social Security may cause problems down the road. “Current law requires that only dedicated taxes, notable payroll taxes, can be used to pay Social Security retirement benefits. Treasury securities in the Social Security Trust Fund, purchased with past payroll tax revenues, will all be redeemed by 2033; and current law could dictate broad cuts in retirement benefits of approximately 20% starting in 2033.” A reduced benefit could be detrimental if you do not have additional savings to cover any shortfall for income.
How Much are Parents Willing to Financially Support Their Adult Children?
According to a Savings.com, 83% of parents support adult children with groceries, 65% help with cell phone and nearly 46% help with vacations. About 77% of the parents attach conditions to the financial support while 23% give the money with no conditions. Nearly 50% of the parents surveyed say they have sacrificed their financial security to give financial assistance to their adult children, and most feel obligated to help. Working parents give two times more money each month to their adult children than they do to retirement funds.
According to a Kiplinger survey, many parents sacrifice to support their adult children, including 52% cutting back on living expenses, 27% postponing retirement, and 39% struggling to afford necessities like bills and groceries. Some question if there is an expiration date to help financially. It is imperative to understand your limits and how much you can give to your adult children without sacrificing your own retirement.
Determine How Much You Can Financially Help Your Adult Child
A first step for parents is to set up a meeting with a financial advisor to determine how much assistance they can offer their children. A financial advisor can 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 ways to provide support without affecting your retirement goals. This assessment should be ongoing and 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 tuition. Parents often also help pay off debts associated with credit cards, medical expenses, and car loans. According to a Savings.com survey of 1,000 parents of adult children, the average amount parents give is $1,474 per month.
Building Financial Independence for Your Adult Child
Teaching your child to live within their means can be a 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 could cause the problems to occur again. There is a difference between helping them in a crisis and bailing them out because they gambled away their rent money. Getting their finances in order will help them get on a path where they will no longer rely on you for financial support.
Develop A Plan Defining Your Financial 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 should agree on a timeline to help 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.
Enable Your Child with Financial Responsibility & Education
While you are financially supporting your children, you can 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. Try being a coach and a resource for your children regarding their finances. You can start by reviewing their budget and determining 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, you can 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 financial assistance in the future.
If you are comfortable, you can take your adult children to a meeting with a 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 not too early to start saving and working with a financial advisor and having a trusted contact can 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 could fall on your children.
Consider The Cut-Off
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. Try to be patient and stick to the plan for financial freedom for both parties.
Keep Your Retirement Goals A Priority
If you still financially support your adult children and have not explored the impact that support has on your retirement goals, you could find yourself in trouble when it comes time for retirement. You can meet 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 should come before helping your adult children.
Sources:
- Peak-Boomers-Econ-Impact-Study-EXEC-SUMM-ALI-RII-Shapiro-Stuttgen-EMBARGOED-Apr-18-2024-041624.pdf
- The Real Cost of Funding Adult Children: Postponing Retirement | Kiplinger
- Are You a Baby Boomer With $500,000 or Less Saved for Retirement? | Kiplinger
- Percentage of parents financially supporting adult children reaches a three-year high
