A wise man once said, “Money isn’t everything in life, but it keeps you in touch with your children”. The term “millennials” generally applies to the generation born between the 1980s and the 2000s. At the heart of this generation are recent college graduates — young professionals who have (hopefully) secured a well-paying job in their field of choice. According to a study from the Pew Research Center, the unemployment rate for adults ages 18 to 34 declined to about 7.7 percent earlier this year, a significant improvement from its 12.4-percent peak in 2010. Median weekly earnings, albeit modestly, are also up.1
Considering these trends, you may assume that millennials — myself included — are moving out of their parents’ homes and becoming increasingly independent, right?
Not quite. In fact, the number of young adults living independently (heading their own households with or without a spouse) has fallen by four percent since 2007. Consequently, the number of young adults living with their parents has increased by two percent over the same period.2
There are a number of factors at play here, including increased student loan debt, a decline in young adult marriages and less of a social stigma placed on young people who opt to move back home after college. (You hear that? It’s not uncool to move in with your parents anymore!)
I personally fell into this category: after graduating from the University of Wisconsin – Madison last December, I moved back in with my parents for six months as I acclimated to my new job. During this time period, I was able to build up a sufficient emergency cash fund before I moved out on my own, which proved to be incredibly beneficial. My parents, being the generous people they are, were happy to take me in (I’ll also mention they were happy to send me away).
Of course, parents love their children and want to provide them with financial support as they please. However, this trend raises an important question: what are these extra expenses really costing parents, in terms of saving for retirement? According to a study performed by Merrill Lynch and Age Wave last year, 68 percent of adults age 50 and older provided some sort of financial support to their adult children within the past five years. Families with at least $250,000 in investable assets gave an average of $9,200 each year to their children over that five-year period.3
To further illustrate the impact of this spending, let’s say that a 50-year-old parent took that $9,200 and contributed the funds to their retirement plan each year for five years.
He or she could accumulate more than $110,000 in savings by age 65 — nearly a 50-percent increase in the $250,000 of investable assets indicated by the survey respondents!4
While this is just a hypothetical example, the point is clear: providing consistent, financial support to your adult children can limit your ability to achieve your personal financial goals over the long term.
So how can you sustain your own financial footing, while easing your child into self-sufficiency? Here are some tips to keep in mind:
Quantify Your Spending and Contributions to Your Children
Though you’re currently providing a financial cushion for your children, it’s important to develop a sound financial plan for yourself, particularly with the help of an accredited financial professional. Aside from receiving advanced financial expertise, it’s beneficial to have someone that can hold you accountable for your spending and saving, especially during your 40s and 50s, which can be some of the most critical years for retirement planning.
As part of the plan development, you will need to track your spending over the past year, and distinguish your discretionary expenses, or non-essential life expenses, from your non-discretionary expenses. By using this method to categorize the amounts you are providing to your children, you can differentiate between reasonable and unreasonable financial support.
That said, your interpretation of expenses like rent, a car payment, student loans or a cell phone data plan might vary depending on your situation. Taking the time to prioritize your family values is highly recommended. By forecasting your current and future spending needs, you may discover some significant gaps in your retirement savings and investments that may require you to adjust the support you are currently providing your children.
Create an Exit Strategy
Having the conversation with your children about when you plan to “cut them off” is easier said than done; however, establishing expectations sooner rather than later is an important aspect of the plan. Telling your children when or how much you’ll be pulling back gives them an opportunity to create a financial plan for what is to come.
It is imperative to have this discussion well in advance of your retirement date, so you can allow enough time for your savings to grow (preferably in some sort of tax-deferred vehicle). It is also important to remember that this timeline is not set in stone. Consistent, open communication among family is needed to modify the plan appropriately, in response to ongoing life changes.
Utilize Loans Instead of Gifts
Of course, there will be mortgage payments, car purchases, medical bills and other significant expenses your children will incur throughout their lives. You might consider providing them with loans to cover these expenses as an alternative to gifting.
Loans provide the support and satisfaction that comes from gifting without sacrificing your retirement savings contributions.
Another incentive to loaning is that your child may not have to pay you interest. Depending on the net investment income of the child you lend to and the loan amount, taxes may or may not be owed on the imputed interest of the loan. What’s more, the Applicable Federal Rate (AFR) at which the interest may be calculated is typically lower than mortgage and auto loan rates.
The Bottom Line
Now, I’m not here to tell you to stop providing financial support to your adult children. You are a proud parent who has the right to provide your children with all the love and support your heart desires. But it’s also important to consider the impact your support has on your personal goals, now and in the future. By employing the strategies listed above and sticking with a disciplined financial plan, you can find yourself in a strong and secure financial position — ready to enjoy your retirement.