Escalating living costs, stagnant wages, and soaring housing costs are driving adult children back home.
This boomerang generation’s return is forcing parents into a financial tug of war between supporting their adult children and securing their own financial future. Many parents are tapping their retirement savings to support their adult children.
A recent Harris Poll survey found that nearly half of individuals aged 18 to 29 live with their families, the highest percentage since the 1940s. Similarly, a Bankrate report found that almost 70% of parents with adult children have made financial compromises to support them. Almost one in five parents polled say they have sacrificed their retirement savings to help their children financially.
Economic headwinds for millennials
Crippling student loan debt is intensifying the trend of young adults leaning on parental support.
“Many student loan borrowers have not been able to earn sufficient income to pay down their loans, and their parents often feel compelled to use retirement savings to help their children,” says J. Derieck Hodges, a certified financial planner with Anchor Pointe Wealth Management in Jackson, Miss.
Millennials are weathering economic headwinds while in the midst of what should be their peak earnings years. In a survey conducted by Ameriprise Financial, a majority identified high inflation (90%), potential tax increases (84%), recession (83%), and high interest rates (80%) as primary financial challenges.
“These broader economic pressures combined with the rising cost of college and homes mean young people need financial help from family to make their goals a reality,” says Marcy Keckler, senior vice president of financial advice strategy at
Ameriprise Financial.
College tuition costs, for example, have risen at 8% a year, far outpacing overall inflation.
Risks of diverting retirement funds
Parents may be overlooking the long-term impact of prioritizing their children’s needs on their own retirement savings.
“The lack of retirement stability may force parents to rely on those same children at some point in the future forcing their children into yet another financial predicament,” cautions Devin Joyce, financial planner at Prudential.
“As a parent you have to decide if you want to be the bad guy now or later,” says Joyce.
Then there’s tax consequences of tapping retirement savings to help children. Parents can end up “utilizing retirement assets sooner, and in larger amounts, generating higher taxes and, possibly, Medicare Income-Related Monthly Adjustment Amount (IRMAA) premium surcharges,” notes Hodges. Retirees whose income exceeds certain thresholds are forced to pay higher Medicare monthly premiums.
Experts insist parents put their own oxygen mask on before helping others. “It’s nice to help if you can, but don’t deplete your own resources,” says Rossman. “Not to sound insensitive, but there’s no such thing as a retirement loan, [whereas] your kids can get loans to pay for college, cars, homes, etc.”
The squeeze of financial support
Parents often assist their children with significant milestones such as college education, first home purchases, and weddings. Housing is particularly challenging.
It’s important to make a distinction between one-time assistance versus continual financial support. “Parents may financially assist their child’s transition into their first apartment by covering the initial rent and security deposit,” says Keckler. He adds from there on, young adults should “be able to support themselves by paying their own rent and other living expenses.”
Glide path and exit strategy
Navigating the financially supportive role for adult children can be emotionally fraught for parents. Experts say establishing boundaries and rules in advance help protect parents’ financial well-being and avoid potential family discord.
“Parents should create clear expectations for the level of support they are willing to provide and how long that support will last,” says Joyce.
Have a glide path in mind and communicate it well in advance. “Maybe it’s fine with your adult children to live with you for a year or you’re willing to pay for their cellphone until age 25,” says Rossman.
Giving adult children a target date for when the support will expire will motivate them to get on their feet. “Providing support with no boundaries can de-motivate them and ultimately hurt their self-esteem and perceived self-worth,” he adds.
Another strategy is to ensure your adult children have some skin in the game. “Maybe they can kick in some nominal rent money or contribute toward household expenses such as groceries and utilities,” says Rossman.
Instead of writing a check to help your child buy a car or house, parents might cosign on a loan to help them lock in a lower-interest rate or more favorable repayment terms, “with a clear understanding that your young adult child will be expected to make the payments on their own,” she adds.
Finally, parents should consider creating a financial plan that factors in the possibility of adult children returning home. “Decide what financial milestones you want to assist your adult children with and incorporate them into your plan,” says Keckler. “This approach allows you to be intentional with each dollar coming in and going out.”
At the very least, treat it like a vacation and plan ahead for it financially. “Only if you have sufficiently saved for your retirement goals, should you provide assistance to your children,” says Hodges.
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