Financially Helping Your Adult Children Can Be a Bad Idea
By BARRY SPARKS
It’s only natural to want to help your children financially, even when they become adults. Parents don’t want to see their adult children struggle with day-to-day expenses or long-term debt.
Nearly 3 in 4 parents with adult children say they help their grown kids with their finances, according to a study from CreditCards.com.
This arrangement, however, presents a potential danger to both the parents and the adult children.
“Boomers are generous to a fault with their children and grandchildren,” says Maddy Dychtwald, a Wall Street Journal blogger, author, and co-founder of Age Wave.
“Parents provide $500 billion in support of their adult children. That is a staggering number,” says Dychtwald.
She points out that the average boomer contributes as much to the financial support of their adult children as they do to their retirement savings.
Contrary to popular belief, it’s not just wealthy parents in the top 1% or the top 10% of wage earners who are financially assisting their adult children.
“Many middle-class parents are making sacrifices to help their adult children,” says Dychtwald. “While parents are being generous in their support of their adult children, they are short-changing their retirement savings.”
The statistics support Dychtwald.
A recent survey conducted for Northwest Mutual found 1 in 3 baby boomers have less than $25,000 in retirement savings. A survey conducted by GoBankingRates found only 23% of Americans over age 55 had saved $300,000 or more for retirement.
Helping adult children pay expenses is one of the reasons baby boomers give for not saving enough for retirement.
According to Dychtwald, 82% of parents would make major financial sacrifices, such as delaying retirement, taking money out of their retirement fund, or avoiding major purchases, to financially help their adult children. Some financial advisers say they have seen parents deplete their retirement savings to help an adult child.
Interestingly, a majority of Americans believe parents are doing too much for their young-adult children today.
Financial independence has traditionally been one of the signs of adulthood. This typically came after the child graduated from college, around age 22. Now, however, financial independence has been delayed until much later. Thirty-one percent of adult children, ages 18-34, live with their parents, according to Dychtwald.
The financial support most parents are providing for their adult children isn’t for emergencies. It tends to be for day-to-day expenses, such as rent, cellphone bill, cable television, and utilities.
“Only 25% of the financial support is going toward paying college loans,” says Dychtwald. “Other debts parents tend to help with are those associated with credit cards, medical expenses, and car loans.”
Dychtwald believes Americans have created a generation of arrested development in regards to financial independence.
“Parents mean well, but they aren’t doing the right thing,” she stresses.
In addition to creating a financially dependent generation, parents run the risk of shortchanging themselves in retirement. Since Americans are expected to live to age 85, they will need more money in retirement than previous generations. That sets up the possibility of them having to financially depend on their adult children in their later years.
Dychtwald says one of the best gifts parents can give their children is to teach them to be financially independent and to live within their means. Sometimes, adult children don’t learn those lessons until they experience failure and the consequences of their poor decisions and habits.
Kathy McCoy, Ph.D., a marriage and family therapist, says repeatedly financially rescuing an adult child can set up a pattern of dependency and expectations.
Saying “no” to adult children isn’t easy, but parents must learn to do so.
“Learning to say ‘no’ is important,” comments Dychtwald. “And, not just about financial support.
“Finances can be an emotional issue for both sides. The goal is to have open communication to discuss the issue and make decisions together. That’s really the most important advice I can give parents and their adult children.”
Some financial experts suggest parents turn to the calculator before they open their checkbooks. They recommend parents review the adult child’s budget to find out how they are spending their money and the source of the financial problems. Maintaining a budget should be a prerequisite for receiving help.
Dychtwald recommends adult children take online classes, attend community classes, and read books on managing their finances. She says it’s a good idea if parents can attend along with their adult children.
“It sets up opportunities for talking and learning,” she says. “Ultimately, you want the need for financial assistance to be a win/win for both sides.”
Another suggestion is to involve your financial adviser. He or she can explain to adult children the financial impact of the parents’ decision to provide financial assistance. A third-party view can carry a lot of weight.
Finally, before writing a check, advisers strongly urge parents to develop a plan, agreed to by both sides. The plan should include a maximum dollar amount of support and a definite end date.
“Being financially dependent is not good for adult children or their parents,” says Dychtwald. “Both sides need to work together to turn the situation into a positive. Parents need to be able to assure they will have enough money in retirement, while adult children need to be financially independent.”