By Chip Munn
There is a retirement “worry list” that’s nearly universal among Americans. Top anxieties include outliving your retirement savings, the disappearance of the Social Security program, and how you’ll afford quality healthcare after you stop working.
That’s enough to worry about. But there’s another threat to retirement, and that’s adult children receiving financial support from their parents. A 2019 survey found that over 90% of American homeowners have provided financial support to their adult children.
Supporting an adult child can negatively impact your retirement plans and throw off when you retire, your desired retirement lifestyle, even if you can stop working altogether.
Here, I explore the issue and its effects, plus provide a few solutions to break the habit of supporting an adult child and keep it from breaking your retirement plans.
What’s Wrong with Help from Mom and Dad?
Parents and children are understandably closely connected financially. One of the fundamental responsibilities parents have is to provide financially for your children. When this financial support starts is easy to see – it’s when a child is born (more likely before they’re born). But when a child’s financial support ends and financial independence begins is undefined and fuzzy at best. A recent survey spells it out clearly: Around half of U.S. homeowners provide financial support to their adult children. Unfortunately, this trend is a threat to some parents’ retirement plans.
Why Do Parents Support Adult Children?
Societal norms and values place responsibility on parents for the financial welfare of children, and rightfully so. There seems much less of an emphasis on the parental responsibility of teaching financial independence to their children. As a result, many parents continue to support adult children financially.
Scores of young adults aren’t making ends meet for basic needs like housing, insurance, and transportation. Millenials, those born 1981-1996, for example, face lower wages and higher unemployment. Adult children are turning to Mom and Dad for financial help to make ends meet.
There’s a difference when a parent offers to assist an adult child with an emergency need like an unexpected car repair bill versus continually providing funds that support a lifestyle.
When Does Supporting Adult Children Become an Issue?
It becomes a problem when parents’ money goes toward the adult child’s expenses instead of an intended retirement plan. Supporting an adult child can have an alarming impact on parents’ finances. A 2019 survey found that helping adult children disrupted parents’ finances and their ability to save.
The risk to parents’ finances from providing the adult child support is more than depleting a retirement account or redirecting money tagged for retirement savings. Some parents liquidate retirement funds at low valuations and end up compromising their retirement objectives. These withdrawals can produce a cascade of potential issues, including having to pay taxes and penalties.
Besides helping out with direct cash disbursements to their adult children, indirect payments take place through what’s called resource sharing. That’s when parents pay for something directly, and the adult child reaps the benefit. Some examples include car insurance and cell phone service that are in the parents’ name. You can add groceries to that if the adult child lives at home (a genuine issue, as about half of homeowners in one survey had an adult child living with them). In reality, parents’ problem supporting adult children is likely more significant than what the numbers tell us.
What Are The Consequences of Helping an Adult Child?
Providing adult children with financial support is enabling on numerous fronts. First, it hobbles a child’s financial independence, at least temporarily. It also sends a message that Mom and Dad are a habitually available safety net for any financial issues, from actual living expenses to careless spending.
Parents can be forgiving when it comes to kids “taking their stuff,” like a t-shirt or a handful of french fries from your plate. But when it comes to money, it's rightfully yours. You are the owner of the assets you worked for, and just being your adult child does not give them a right to it in every instance. Besides saving for retirement, you may want to give it to charity, invest in a second home, or visit Scotland as you’ve always wanted. It’s your money, and you have the right to spend it in the manner you see fit.
Sometimes telling a child “no” to your money is a challenging, even impossible conversation for a parent. When I hear a client mention this problem, I may suggest that they tell their child that they need to discuss it with me, their financial advisor, first. This approach accomplishes two things. First, it establishes a precedent that Mom and Dad are not a 24-hour ATM, and secondly, that care and thought should go into making important monetary decisions.
If You Must, Have a Plan.
Parents may find it impossible to avoid supporting their adult children. When that’s the case, it’s beneficial to set up a system that includes a pre-determined plan and a payment journal.
Providing money to an adult child according to a plan encourages good spending habits. A payment journal includes a summary of all cash transactions and any shared resources (cell phone or auto insurance, for example) paid for by the parents. Keeping this journal with a child as a collective activity helps build financial responsibility and accountability when they see how much money is involved and where the money is going.
Some parents want their children to pay them back, even choosing to have their child pay interest on the amount they received. Others allow their child to pay off the debt with work around their house or performing community service. These are individual decisions that each family makes. In any case, have a plan, keep good records, and make it easy to discontinue the financial support to put the adult child on the road to financial independence.
About the author: Chip Munn
Chip Munn is a senior wealth advisor and CEO of Signature Wealth Group. He is the author of The Retirement Remix: A Modern Solution to an Old School Problem, and host of Maximum Advisor and The Retirement Remix podcasts. For more information visit www.chipmunn.com and connect with Chip on Twitter @chip_munn.