According to a recent study by TD Ameritrade, 25% of baby boomers are supporting their family members financially (1). Support to adult children averages out to $10,000 per year. That’s $10,000 that boomers aren’t saving, contributing to retirement accounts, or investing.
Can your retirement afford that kind of generosity?
If you fall short of your retirement goals, is the adult you’re bailing out going to bail you out during your golden years?
Before you write your struggling young adult another big check, ask yourself these four key questions:
1. What, specifically, is this money for?
The key word here is SPECIFICALLY.
Many parents tend to err on the side of protecting their child’s feelings when weighing financial support. We know asking for money can be embarrassing, and we don’t want to deepen that embarrassment. Or we’re worried that if we ask too many questions the child will become frustrated and hide serious problems from us going forward.
These are understandable concerns. But it’s also important that you understand whether your child needs support because of something beyond his or her control (a car accident, serious health issues, unexpected job loss) or because they’re struggling with basic adult responsibilities. If your child is making poor budgeting decisions or settling for underemployment, you may be throwing good money after bad.
Be tactful, but get to the root problem before you decide if your money is the best solution.
2. What is the real cost to me?
Many parents are already helping their adult children more than they realize.
For example, you might not think much of letting your adult children stay on the family cell phone plan or piggyback on an HBO subscription. After all, it’s only twenty bucks a month, right?
But how long have you been giving your child that monthly free pass? Years? You can also set time limits. For example, tell your child they can remain on the family cell phone plan until age 25 or until they get married, whichever comes first.
Are you helping with larger monthly expenses, like student loan or car payments? When will it finally be time to pull the plug?
Our advice: get it all down on paper. Make a spreadsheet that accounts for the financial support you’re already giving your child, large and small. Seeing how even small expenses accumulate over time will be eye-opening for both of you and help inform a good decision.
3. What are the terms of the bailout?
This is another area that parents tend to tiptoe around because they’re afraid of insulting their children. But do you know of any bank that’s going to loan your kids money indefinitely, charge no interest, and ask for no repayment? Then why should your money be subject to such lousy terms?
Your children have to understand that your generosity is not open-ended, especially as you near retirement age. You’ve probably made many sacrifices for them already. You should not sacrifice your financial security or the nest egg that is meant to support you in retirement.
If your children want you to “be the bank,” then you have every right to act like one. Set clear terms in writing, including a repayment schedule. In more serious cases, you might want to bring us a copy of this agreement so that we can include it in your estate plan.
4. How else can I help?
It’s very likely that your child spent 16 or more years in school without learning a single thing about managing money. Financial literacy just isn’t taught in schools. This knowledge gap could be a big reason your young adult is struggling.
A BMO Wealth Institute survey found that two-third of parents give money to adult children when a sudden need arises (2). Does your child need money suddenly because he or she doesn’t know how to budget? Help find that balance between covering current expenses and contributing to savings and investment accounts.
Housing and transportation expenses can be a shock to recent college grads. You could help your child negotiate a car lease. You might help a child who’s already chasing after the Joneses by counselling against a rash home purchase that will stretch his or her finances thin.
Introducing your underemployed child to some of your professional connections might lead to a significant career upgrade.
One key connection you should be sure to tap: your fiduciary advisor! We’re always happy to help our clients’ adult children get on their feet. We consider this a service to our clients because we know that the less you’re worried about supporting your children, the more secure your own retirement goals will be.