Each year, an increased number of baby boomers find themselves financially supporting their adult children in some way - often to the detriment of their own financial goals. A recent survey from Savings.com suggests that nearly 45 percent of parents with adult children still pay a large portion of the expenses for their children - with an average payment of nearly $1,442 per month toward their bills. Statistics also show that parents that are ten years or less from retirement tend to contribute the most, with almost $2,100 per month going toward supporting their adult children. Unfortunately, these same parents are only saving $643 per month toward their own retirement accounts. With many boomers already falling short of their retirement goals, the fear is that many parents are providing financial assistance to their grown children at a time when it might not be financially feasible - ultimately leading to the postponement of retirement.
"Emerging Adults," a term coined by psychologists to describe this group of 18-to-25-year-olds, have been leaning on their parents for financial support to help with everything from housing assistance to student loan payments. The challenges faced by millennials are well documented. Student loan debt has reached epidemic levels with over $1.7 trillion in outstanding loans. For many graduates, their student loan debt repayments can be as high as an average mortgage payment.
Additionally, the unemployment rate among 20-to-24-year-olds is generally higher than the overall population with nearly 7.2 percent unemployed as compared to 3.8 percent in the overall population. These challenges have led to other forms of financial support and an increased number of adult children choosing to live at home with their parents for an extending period of time. According to the US Census Bureau, about 18% of men and 12% of women ages 25 to 34 were living with their parents. With the vast majority of American households requiring two incomes to make ends meet, it is not surprising that it has been more challenging for millennials to leave the nest. Additionally, the high cost of rent and elevated real estate prices has also contributed to children choosing to remain at home longer.
Parents need to protect their finances too
Regardless of the reason and the financial challenges millennials face, it may not be advisable for a parent to compromise their retirement to support their adult children. Sure, there are circumstances that are unavoidable that require the assistance of a parent - divorce, health related issues or other serious unforeseen challenges.
However, many parents have chosen to support their children for what may be the wrong reasons while spending down precious retirement funds in the process. Remember, retirees cannot borrow their way through retirement. Children have many more years of earning potential ahead of them as compared to a parent who may be right around the corner from retirement.
While it might be easier said than done, parents should have a clear understanding of their financial picture before committing funds toward the support of adult children. What is the maximum amount that can be spent during retirement? How long will retirement funds last if the decision is made to earmark additional funds toward the support of children? Will the current investment allocations generate the desired amount of retirement income necessary to meet the financial needs? How many years might retirement be delayed as result?
It may also be important for the "sandwich generation" to have a contingency plan for their elderly parents too. Together, the financial strains of caring for an extended family can be extremely challenging, especially for those that are not on track for their own personal goals.
Empowering young adults to make better decisions while also setting healthy boundaries for assistance
Improving financial literacy and empowering rock-solid financial decision making may be one of the best ways to assist millennials. Rather than focusing on financial support, parents should consider assisting children in the development of a financial game-plan including budgeting, goal setting and independence planning.
If financial support is necessary, establishing boundaries and a time-frame for them to leave the nest should be considered. Gradually weaning them off of a parent's financial support system and onto their own two feet can help. It may take time, but setting limitations for support and incentives for independence may help encourage millennials to move forward. Limiting student loan debt before it becomes a problem is also critical. If student loan debt has already become a problem, consider working toward developing a plan to address these payment challenges.
While it may not be easy and there is no denying that millennials face an uphill battle, parents should be careful to balance the support of their adult children against maintaining their ability to reach their own retirement goals. After all, the parent does not want to become a financial burden for their child in the future.
Kurt J. Rossi, MBA, CFP®, AIF® is a CERTIFIED FINANCIAL PLANNERtm & Wealth Advisor. He can be reached for questions at 732-280-7550, kurt.rossi@Independentwm.com, www.bringyourfinancestolife.com & www.Independentwm.com. LPL Financial Member FINRA/SIPC.