More and more adult children are living with their parents and grandparents, according to a Pew Research study. The 2013 study shows that nearly three in ten young adults ages 25 to 34 (29%) have lived with their parents in recent years, and 78% of these boomerang children say they’re satisfied with their living arrangements.1
Even if the adult children and their parents or grandparents are satisfied with the day-to-day living arrangements; it’s imperative that you examine how this situation is affecting your retirement plan. Supporting adult children can certainly take a toll on your retirement planning by potentially throwing off your timeline or the amount of money you are able to save.
Your financial advisor can help you to see how the figures add up in your current situation. However, only you can strike a balance for your family between providing enough support to set your children on a productive course without undermining your own financial well-being.
As you work to strike that balance, consider the following:
Cultivate Independence - Both For You and For Your Children
When it comes down to it, parents want their children to be independent. After all, parents aren’t always going to be around to save the day, and kids are much more confident and successful when they can count on themselves.
With every request for financial aid, parents can use the following question to help them as they decide whether or not to step in:
Will providing money help our son or daughter to become financially self-sufficient, or will it prolong dependence?
Using this question, you can make decisions that will likely cultivate independence in your adult children. For example, you may find that paying for a gym membership prolongs dependence on you. If your child doesn’t have to work to improve his or her lifestyle, there’s no motivation to change. However, you might find that contributing to a down-payment on a first home puts your child on the road to financial independence.
Continuing to contribute to your retirement funds will accomplish several goals. First, it will keep you on the road to your own personal financial independence. Sidelining your personal financial goals to pay for your children’s lives will hurt your financial independence in the future. Second, you will be setting an important example for your children as you teach the day-to-day lessons of reaching financial goals.
Consider the Tax Implications
If you decide to assist your adult children by giving them money for a down payment on a house or car, remember to check on the tax implications first. The IRS allows you to give up to $14,000 per year without triggering the gift tax, and if you’re married, both you and your spouse could give $14,000 in one year to a child (for a total of $28,000).2 However, if you gift beyond these amounts, you’re looking at hefty taxes that could derail your retirement savings.
An important tax exemption is money spent on tuition. If you decide to help your adult child or grandchild by paying college tuition, pay the institution directly instead of giving the money to your child or grandchild and having them pay. This will keep matters simple with the IRS.3
Require Something In Return
Supporting adult children can really take a toll on your retirement. If you neglect your retirement contributions every time your child needs help, you’ll slip farther and farther away from your financial goals.
There are many ways to require something in return for your generosity, and in doing so you can continue to contribute to your own retirement plan. For example, you could ask your children to pitch in for rent, groceries, utilities, insurance, etc. to make up for some of your costs. If that’s not a possibility, children can pitch in by helping to maintain the household (i.e. cooking, cleaning, doing the grocery shopping, and mowing the lawn are all ways adult children can pay you back for the financial support you offer). This is especially helpful if you can cut back on services you’d normally pay for (like cleaning and yard services).
Establish Clear Guidelines
One of the problems with allowing boomerang children to live at home is that parents lose track of how much they’re spending on their adult children. This spells trouble for your retirement planning, and it also makes it difficult for adult children to know how much their lifestyle really costs—thus perpetuating the myth that they can’t afford life on their own.
You may be able to avoid this problem by establishing clear guidelines from the start. For instance, agree to pay your son’s $350 student loan payment each month as well as his health insurance bill, but establish an end date to motivate your child to work toward financial independence. It may be helpful to pull out your latest retirement plan statements to show how your own plans are affected by supporting your adult children. Furthermore, avoid paying for the latest tech gadgets or vacations—these items are luxuries your adult child should work for once he/she is on their own.
Avoid Tapping into Retirement Saving Plans Early
When you’re supporting adult children, it may be tempting at times to borrow from a 401(k) or IRA, especially if a large, unexpected bill comes up. For instance, if your child is facing a foreclosure or runs into serious health issues, you might immediately think of all that money just sitting in your retirement accounts that could save the day. This should be a last resort4 because your retirement savings will be seriously compromised. If you’re under the age of 59 ½, you’ll face a 10% withdrawal penalty and have to pay ordinary taxes on the money you withdraw from your 401(k).5 To avoid these penalties, tap your available cash in your emergency fund first, and then use money from liquid resources like money market accounts next. Try to leave your 401(k) and IRA intact.
Remember that you can only help those around you when you have enough to give. If you don’t take care of your own financial planning, you will eventually be the one who needs help. Do your children a favor and take care of your own retirement planning. If this means that you have to say ‘no’ to some of their requests, so be it. You will be positioning yourself to be financially independent in the future, and you’ll teach your children that they should be focusing on independence as well.
If you'd like to learn more about planning for retirement and the various implications of supporting adult children, a personalized investment plan from one of our Wealth Managers can help. Give us a call today at 1-800-541-7774 or contact us here to begin the conversation.
Sources:
2. IRS.gov
3. US News
5. CNN
