Aug. 12, 2019
A Bankrate survey on financial independence recently reported an alarming trend among parents with adult children. A full 50% say they have sacrificed or are sacrificing their own retirement savings in order to help their children financially. What’s more, one in five working Americans isn’t saving any money for emergency funds, retirement or other financial goals.
While most parents would do almost anything to help their children, knowing where to draw the line and when to withdraw financial support can be critical for both young adults and their parents when it comes to the pursuit of financial security and independence for both parties.
A few years ago, I met with a mother of three grown children who asked me an interesting question: How do I know when my children have found their wings? She went on to explain that several weeks prior, she had been watching a pair of cardinals from her back deck over morning coffee when she noticed they were both flying erratically from the branches of a tree toward the ground and back. Initially, she thought it was some sort of mating ritual until she noticed a much smaller bird on the ground by the trunk of the tree that appeared unable to fly. As she moved closer to the small bird to determine if it was injured, she realized it had fallen from its nest. Not sure what to do, she grabbed her phone and searched the internet for “how to return a baby bird to its nest.” What she found surprised her.
The young bird was a fledgling—fully feathered and able to hop and flap its wings, but unable to fly just yet. It turns out that once a fledgling leaves its nest, it rarely returns. So placing the fledgling back in its nest would almost certainly result in the bird hopping right back out. While the fledgling is only able to hop and flutter at this stage, the parents remain nearby, helping to care for and feed their offspring. However, once the bird finds its wings, it’s on its own.
While nature tends to have very clear rules about when offspring are considered fully independent, the lines are a lot fuzzier for humans. In fact, PEW Research reports that nearly 79 million adults (31.9% of the adult population) lived in a shared household in 2017 – that is, a household with at least one “extra adult” who is not the household head, spouse, unmarried partner or college student. In other words, “boomerang kids”.
Boomerang kids are typically defined as young adults past college age who have moved back home temporarily because they’re between jobs; have experienced a financial crisis, such as divorce or a medical crisis and are trying to get back on their feet; or simply aren’t making enough money to support themselves in their current job. They’re also a leading reason why many baby boomers are under-saving for retirement.
Instead of downsizing to reduce mortgage, utility and related housing costs, many boomers are hanging onto the family home to accommodate adult children in need of an affordable place to live. Many are also working longer than planned, which is a key reason why the Bureau of Labor Statistics anticipates the labor force participation rate to increase fastest for the oldest segments of the population—most notably, people ages 65 to 74, and 75 and older—through 2024. One problem with these numbers is that many older Americans may not have the choice to continue working, due to physical limitations, medical conditions or other circumstances.
While establishing firm financial boundaries can be hard, it is necessary for the wellbeing of parents and their adult children. If you find that you’re putting your own retirement at risk to help adult children financially, or if you simply want to help your children become more financially independent, take the following steps.
1. Begin with a cost analysis
To determine the current and future cost of providing adult children with financial assistance, begin by adding up any monthly bills you pay on your child’s behalf, on a regular or as-needed basis. This may include healthcare premiums if kids are still on your insurance plan; help with student loan debt or credit card payments, car payments and/or auto insurance premiums, cell phone bills, etc. It turns out even financially independent kids can be stubborn barnacles on cell phone plans.
If you spent time as an empty nester, you probably noticed a decrease in your grocery and utility bills after your children moved out. Now that one or more has moved back in, try to quantify these costs to determine the average monthly increase. Also consider what you’re paying, if anything, in clothing and other incidentals on their behalf. And don’t forget the things that may not be on your day-to-day radar, such as Netflix or Amazon Prime account, where you’re picking up the bill for a service that is shared. Even small subscriptions can add up over time.
This exercise will help you quantify the “cost of carrying” an adult child who has moved back home. Keep in mind, in most cases, if your child is over age 19 and is not a full-time student, he or she can no longer be claimed as a dependent for tax purposes. As a result, you’re not able to claim certain tax credits or deductions on your income tax returns as a result of the financial support you provide. However, for cash gifted to a child, you may be able to deduct up to $15,000 ($30,000 annually for married couples filing jointly) under the estate gift tax exclusion. Keep in mind though that gifting money to a child if you have not yet saved enough for your own retirement, or have not worked with a financial advisor to help determine how much you may need to cover your own expenses for 25 or 30 years (or more) in retirement, can prove disastrous to your own long-term goals.
2. Help young adults establish a budget
If your child does not have a budget, it’s time. A budget is the only effective way to determine how much money is coming in, what’s going out, and where discretionary spending can be curbed to create more opportunities to save and invest. Think of a budget as your child’s launch pad. It’s the foundation he or she will use to build toward financial independence. Fortunately, there are dozens of millennial-friendly budget apps available for mobile devices, many of which connect directly to online bank accounts to deliver real-time updates to users.
3. Don’t be afraid to make them pay
Allowing kids to live rent-free may sound like a good way to help them get on their feet, but more often than not it can backfire. Unless your child is a disciplined saver or is in a real hurry to move out, over time that “rent savings” can mysteriously find its way to paying for other discretionary expenses, such as a new gaming console or a spring break getaway to Cancun. It’s important for kids who are out of college and working fulltime to understand that paying for a roof over their heads is one of life’s essential and ongoing expenses, along with food, clothing, healthcare, and transportation.
Charging kids rent helps them budget for and develop a more disciplined approach to their finances while helping you cover any increases in your grocery and utility bills, and boost emergency and retirement savings. If you really don’t need the additional income, you can always sock it away in a savings account and gift all or a portion back to your child later to help pay the security deposit on a rental property, or to help with the down payment on a mortgage.
4. Encourage retirement savings now
As I talked about in 4 Factors That May Determine Your Retirement Nest Egg: What I Learned from Managing 25,000 Plans, there’s no substitute for investing early in a qualified retirement plan. The earlier you begin saving, the greater the benefits of tax-deferred compounding. If your child is eligible to participate in a workplace retirement plan, encourage him or her to start now, even if they only save a few dollars a month. If your child does not have access to an employer plan, he or she can open a Roth IRA with as little as $1,000, and some financial institutions will waive the minimum investment amount if you sign up for regular, automatic contributions.
5. Meet with your family financial advisor
A reality all parents seem to share is that our children don’t always welcome our advice with open hearts and minds. That’s where your advisor can help. As an objective third-party, and someone who understands your family’s challenges and goals, your advisor can answer questions, share knowledge and guide your adult children toward adopting sound financial habits.
While helping family is always a noble cause, providing financial support may not always be the best way to help children become independent, especially if it requires sacrificing or delaying your own life goals.
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