Saving for retirement and providing for your children are two hallmarks of personal finance. There is ongoing debate as to which should come first and which takes a back seat. This is especially true when children are older. Children are expensive (college notwithstanding), yet you also need to make your retirement plan a vital part of your overall financial plan. Regardless of where you stand on the debate, most people agree that both are vitally important.
It’s much more of a black/white issue when your children are younger, but it becomes grayer as your children get older. Enter the term ‘Boomerang kids.’ These post-college kids either return to live at home with you (usually out of financial necessity), or are still being supported financially though physically on their own.
Society has largely satirized the Boomerang generation, but one of the important issues at play is how the need to support your adult children can impact your retirement plans. Your intention to provide for adult children is noble but sadly, often funded by retirement savings. According to a recent study by Time Magazine, 70 percent of parents polled provided up to $5,000 per year supporting an adult child.
Two-thirds of those over 50 years of age have financially provided for a child over the age of 21 in the past five years. The dollar amounts might not seem significant, but repeated contributions over a number of years add up to a loss in capital that your retirement fund may feel. If you’re currently dealing with this issue, or are wanting to protect against it, we asked Roger Wohlner, CFP® and founder of The Chicago Financial Planner to share some insight into how best manage the balance between Boomerang kids and your retirement planning.
Times Have Changed
Parents helping adult children is nothing new. It has gone on for many years for a variety of reasons. Now new societal, economic and cultural factors have brought Boomerang kids to the forefront of America’s consciousness.
Since the Great Recession, young adults have left college for a poor job market with an increased student loan debt load. This has resulted in more adult children either returning to their childhood home or receiving some form of financial assistance from their parents.
A 2012 Pew report revealed that 36 percent of Millennials (18-31) were living at home. For perspective, the number of young adults living at home had remained at a relatively constant 32 percent as of 2007. In just the next five years, by 2012, we saw the highest amount living at home in four decades. This represents a growing trend that’s now impacting many more families.
This increase in the number of adult children living at home impacts one thing – the finances of the parents and more specifically, the funds they need to accumulate for retirement. When push comes to shove, having to make choices on what to fund – kids or retirement — carries the risk of impacting a parent’s ability to retire. In fact, a study from Hearts and Wallets, reveals that those over 65 with financially independent adult children are twice as likely to be retired than their counterparts still supporting adult children. Taken with the amount provided to adult children by their parents this can have a direct impact on parents’ ability to retire on time.
The Long Game Must Be Kept in View
As a parent, you want to be able to provide for and support your children. Having Boomerang kids, however, opens parents up to the risk that they will not be able to retire when they want. According to Wohlner, “The main risk is the increased spending potentially forced on mom and dad at an age where they should be focused on accumulating for their retirement.”
While seemingly cold or uncaring, the long game (retirement) must be kept in view for most parents. These are years that need to be focused on increased accumulation of wealth, diversification of income streams and the decision of when to leave the workforce. It’s a plan that needs to be honed over the course of years. Adding Boomerang kids to the mix, as Wohlner explained, increases the risk of spending funds that should be diverted elsewhere.
For those parents who are supporting their adult children at the $5,000 level or even more each year, the amount they’re providing to them might seem small, and in the near term it appears that way. However, when that number goes on for years, it adds up significantly. Put those funds into an index fund that tracks with the market, and you’re out even more funds for retirement.
Are You Helping or Enabling?
Retirement planning is not the only thing to consider when it comes to Boomerang kids. Another factor to think through is how continuing support of your child will help them for the long term. Some parents might be motivated to cut the support sooner rather than later, but that may not happen in all circumstances. This will have ramifications for you in the long term as well.
With that long-term view in mind, consider other ways you can help adult children that will reduce the financial impact on your retirement. This might include charging rent or helping your adult child find a relatively well-paying job. According to Wohlner, “I think the biggest thing is to teach their kids about managing their money. Parents might also help the child learn to network in order to find a job.” There are many ways to help an adult child that don’t result in a handout but help prepare your children for life on their own.
It All Comes Down to Boundaries
It is not wrong to help your adult children. As a parent, you don’t want to see your children struggle, regardless of their age. Most, if not everyone, would concede that point. The problem is when that help is provided to the detriment of your retirement planning. The wisdom of providing support then begins to come into question.
This is why boundaries are so important when you’re supporting a Boomerang child. Boundaries give you and your child clear expectations and a framework to operate within.
As Wohlner explains, the key to this is setting expectations for when the child would potentially move out to be on their own. It would also set time frames for when they’re expected to begin allocating funds from salary to their retirement and debt payoff efforts. This may sound like tough love, but it is done with the goal of protecting your retirement planning needs while also helping your children prepare to be on their own.
Charging rent to adult children is likely going to be one of the first options to look at with regards to expectations or boundaries, but they’re not the only ones. Other things to consider are:
• Asking for your child to pay a share of household bills
• Require help around the house with certain chores or duties
• Require your child to run errands or help with other household maintenance needs
These boundaries need to be personal and are going to look different for each family. But they must be set to help the adult child develop basic financial skills so they can go their own way, and to protect you against black hole style spending that sucks the life out of your retirement planning.
Each Situation is Unique
The risk of derailing retirement aside, each situation is going to be unique. In some instances, the adult child may return because of inability to secure a well-paying job. In other cases, it might be suffocating student loan debt or complete unwillingness to move on with their adult life. It behooves you as the parent to look at the situation wisely and make the best decision.
You need to keep your retirement planning needs at the forefront so you don’t run the risk of outliving your assets or pushing back your exit from the workforce to provide for your child. The last thing you want is to need your adult child to care for you later in life because you spent your retirement savings to provide for your adult child today.
If you’re facing a Boomerang child situation, use this as an opportunity to help them prepare for what life will be like on their own. Include them in your household budgeting and retirement planning exercises to transfer some financial knowledge to them. When you do provide for them, do so with your means in mind and not to the detriment of your retirement needs. After all, they have many more years than you do to make up for lost time.