Parents Who Give Money to Unemployed Adult Children Save Less for Retirement

Some advisers warn against risking your financial health to help adult kids; others say it’s what you signed up for.
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Hey, parents: If you don’t know this yet, you’re about to learn a painful lesson. Your unemployed adult children may be bad for your wealth and well-being. 

Consider: Parents who help their unemployed adult children out financially tend to spend less money on food. They work more. And they reduce how much they save for retirement.

In other words, parents offset such costs by adjusting their behavior, according to a RAND Corporation study.

Now, it’s well-known that parents are increasingly helping their adult children by letting them live at home and providing them money and other assistance. But the RAND study says little was known until now about the actual economic impact of such decisions on parents themselves.

“One may assume that since parents willingly help their children, they are not worse off because of that decision,” Kathryn Edwards, an associate economist and lead author of the study, said in a release. “But our research shows that that these decisions may not result in the best financial outcome for the parent.”

In the study, researchers examined the effect of a child’s unemployment (of at least one week) on parents’ financial assistance to the child, as well as the parents’ household food consumption, income and savings.

And what they found was this: When it comes to financial assistance, parents are more likely to give cash to a child once they lose their job, the study found. Researchers also determined that parents spend less money on food once a child becomes unemployed and maintain this drop in consumption for a 2-year period.

Also striking, the study found, is the change in parents’ work and saving habits. Parents work more the year their child becomes unemployed and some parents also decrease savings for retirement.

“On the individual level, most of the changes were small,” Edwards said in the release. “The problem is what this means in the aggregate. When the labor market risk of one generation is informally insured by another, the older generation may be putting their retirement security at risk, while the younger generation has insurance that depends on how willing and wealthy their parents are. This is a trademark of basic economic inequality.”

So, what advice do financial advisers have for parents who are providing financial assistance to unemployed adult children? Well, the first thing to note is that parents sabotaging their retirement for their children is a financial planner’s worst nightmare.

Stressful for Financial Planners

“I have seen this happen in my own client’s lives,” said Monica Dwyer, a wealth adviser with Harvest Financial Advisors. “Parents often make extreme sacrifices for their children even if that means they have to work longer, save less or even put their own welfare and asset level in jeopardy.”

Dwyer shared the story of a client who this year took a withdrawal from her retirement account so that she could support her son who was transitioning from one job to another. “I am sure that the son has no idea that his mother is in no position to do this for him,” she said. “I have offered to do planning with her but she refused. She knows that she is in danger of her assets running out, but she wants to live in her house until she can no longer afford it. Since she is still making payments on it, I offered to educate her on reverse mortgages which could help keep her in place as she ages. This is very stressful for financial planners, since we want what is best for our clients and we often see more clearly what dangers our clients are facing than they do.”

Other financial planners are also aware of the problems created by parents supporting adult children, if only for a little bit. “I have heard about this issue from many parents, and it can be really sensitive area,” said Ken Nuttall, director of financial planning at BlackDiamond Wealth Management. “No parent wants to not help their kids, but this could have a huge impact on the parents and delay their own retirement.”

Like Dwyer, Nuttall also shared a story. “I had one case where parents took out huge student loans for their children so that the kids would not be burdened by the loans,” he said. “The problem is that the parents now have that burden and would probably have to delay their retirements by nearly 10 years.”

Drugs and Grandparents

Even more concerning, said Dwyer, is the drug epidemic that causes many grandparents to have to support grandchildren after they may have depleted their own savings to try to rescue their drug-addicted children. “It tears families apart,” she said. “I know children who have been impacted by this. Some know that they are a burden to their grandparents and there are family tensions as a result... Financially these burdens are incredibly difficult.”

Set a Time Limit

So, what should parents do? Nuttall suggests having an endpoint and a path to that endpoint. Tell your adult child/children that you support them for x months and during that time they need to do these things: look for job/apartment/school.

Nuttall also suggests having the child help with some of the bills or even paying rent. “My mother made me pay rent when I first got a job after college,” he says. “It got me into the habit of doing it and the amount was pretty small.”

And, Nuttall recommends that parents have their adult children create a plan, once they do get a job, to save money to avoid the situation in the future.

Separate Your Money

While it’s difficult to watch a loved one struggle when you have access to money, Sarah Newcomb, director of behavioral science at Morningstar and author of Loaded, says it is important to mentally separate money that is earmarked for your retirement as “off limits” or “untouchable” – even to you.

“That money is meant to help you survive when your body can no longer work,” she says. “It is not a rainy-day fund. If helping an adult child make ends meet today means sacrificing your own security, remember this: The more you give to help them now, the more likely you will be leaning on them for help later.”

Don’t Enable

Newcomb also says if you see a pattern of behavior -- with your adult child(ren) leaning on you for financial help -- then your “help” may actually be hurting their ability to grow into independence. “Helping them now puts you both in a precarious position for the future,” she says.

Not All Help Has to be Financial

There are ways to help that don’t involve giving money, says Newcomb. “Helping loved ones navigate the unemployment system, providing free child care while they write resumes, go on interviews, or take classes to improve their earning power are a couple of examples,” she says.

Newcomb also says providing emotional support and helping them to take stock of their situation so they can make the most of what they have to offer employers, or even helping them figure out where they can find food pantries and community support groups are valuable forms of assistance.

What’s your Story?

Newcomb also recommends listening for the “stories” you are telling yourself, and challenge them. “For example, if an adult child has a pattern of coming to you for financial help, do you feel obligated to help?” she asks. “Why? There may be a story you are telling yourself such as, ‘I wasn’t there for them as much as I should have been when they were growing up, so this is how I can make up for that,’ or, ‘A good parent helps their children financially, regardless of how it affects themselves,’ or, ‘If my child fails, I will be seen as a failure, too.’”

These beliefs, Newcomb says, are like mental booby traps that can put you both in a worse financial position. “Try changing, ‘A good parent helps financially,’ to, ‘A good parent helps prepare their children for financial reality,’” she says. “This can then motivate you to help them seek the public and educational resources they have available so that they can truly earn independence.”

You Signed Up for This

To be fair, some experts have a different point of view. Some say this -- helping children when they are down and out -- is what parents signed up for. “As I often say, the biggest risks in life are not in the stock market,” says Meir Statman, a professor at Santa Clara University and author of Finance for Normal People: How Investors and Markets Behave. “If you want real risk, get married. And if you want more risk, have children.”

Some people, says Statman, have the odd notion that parents’ responsibility to help children ends when children turn into adults. “But this study says what should be obvious, that parents help children long into adulthood,” he says. And so it should be.”

This is certainly true, Statman says, when a child is disabled by permanent illness or injury, and it is also true when a child is disabled by short or long-term misfortune such as unemployment or divorce. “It does mean that parents work longer and stint on retirement savings, and even food,” he says. “But that’s a risk that comes with having children.”

Statman also says that what goes around sometimes comes around. “In turn, children care for elderly or disabled parents,” he says. “That, too, is not set in law. But it is set in what we call family. Caring family, bonded by love.”

It’s never too late – or too early – to plan and invest for the retirement you deserve. Get more information and a free trial subscription to TheStreet's Retirement Daily to learn more about saving for and living in retirement. Got questions about money, retirement and/or investments? Email Robert.Powell@TheStreet.com.