Helping Adult Children Financially: Learn to Say No
Their ultimate independence – and your wellbeing in retirement – depend on it
Between high rents, student loan debt and meager wage growth, it’s hardly surprising that young adults increasingly lean on parents for financial support. A Pew Research survey reports that the majority of us think it would be grand for an adult child to be financially independent by age 22. But Pew’s analysis of government data estimates that fewer than one in four grown kids are hitting that milestone these days, compared to one in three in 1980.
Need proof that most of us consider our kids special? In the Pew research, nearly two in three parents said that parents with adult kids between the ages of 18 and 29 generally are doing too much for those kids. Yet fewer than 30% agree that they themselves do too much for their adult children.
When the help is financial, we’re not talking pocket change. A survey last year by Merrill Lynch and Age Wave estimated that the $500 billion in annual financial help that parents give adult children is double what those same parents manage to save for retirement. Nearly three in four parents reported they put their adult kids’ needs ahead of retirement.
Parents who make that choice could be setting everyone up for a difficult future. The less you have saved for retirement, the more likely you will feel money-stressed in retirement — that’s not the goal, right? — and you may end up needing to rely on your kids for help in your later years. That’s surely not an outcome the entire family wants.
The decision to provide financial support for an adult child is, of course, personal. That said, if you have even the tiniest worries about retirement security, you owe it to your entire family to consider recalibrating your support. Not overnight, but by setting a timeline expectation for when your child will be independent. Nearly half of parents in the Merrill Lynch and Age Wave survey said they wished they had established clearer financial boundaries. Here’s how to achieve that:
Adult kids contribute to family expenses. Once an adult child has a job, even if they are still living at home, it’s time to have them participate in bill paying. At a minimum, they should pay their share of a family cellphone plan, and if you’re still covering them on your health insurance, consider having them contribute to your monthly premium. That’s not harsh. It’s building adulting muscles.
Are you thinking, geez, trimming your support isn’t going to make a difference in your financial life? That’s a cop-out.
Right now you may be helping with rent, but it becomes the mortgage, or childcare for the grandkids. Without a conscious game plan, there will always be opportunities to contribute, and you will always default toward giving. The parental instinct to provide doesn’t magically click off at 22 or 25.
Yet if you have even the slightest concern about your retirement security, those are dollars you need to seriously reallocate to your 401(k) or IRA. For instance, let’s say you trim your support by $250 a month. And that gets invested for 20 years earning an annualized 5%. That would add $100,000 to your retirement kitty.
Set limits on what you will help with. Helping an adult child get established is one thing, but often help can extend into bankrolling a nicer-than-needed lifestyle. Money for groceries so they don’t exist on a ramen diet or helping make rent on a shared apartment are reasonable assists. Co-signing a loan for a new car (which should be a used car), or contributing to rent for their own place (rather than shared) is you not setting smart limits.
Hands off your savings. In the Merrill Lynch study, more than eight in 10 parents with adult children said they are willing to make a major financial sacrifice for their adult kids. If you want to trim your lifestyle to come up with the extra cash to help — downsizing your house, driving the car more years before trading in — that’s a responsible tradeoff to consider, and one that 40% of survey respondents mentioned. But half of parents also said they would consider raiding a savings account, and one-quarter said they are willing to pull money from their retirement accounts. What’s more, one-quarter said they would take on debt to help their adult kids. That’s where your helping puts your family at greater financial risk. If you don’t have the savings to take care of yourself, who will? The kids?