Don’t Allow Adult Children To Poach Your Nest Egg

The average cost to raise a child to age 18 is $233,610. For many families, however, the bills keep coming long after that.  This year, 50% of parents surveyed said they were sacrificing their retirement savings in order to help their adult kids. Financial planners are sounding the alarm, fearing that many Americans are putting their own retirement security at risk.

Here’s why you need to pay yourself first and gently push your adult children out of the nest.

You’re Probably Underestimating Your Retirement Needs

People often don’t think seriously about retirement savings and expenses until their mid-40s or 50s. There’s a lot of misplaced optimism and unrealistic expectations about retirement. Some workers plan to “work a little longer” or “save more” to meet retirement goals, but that may not be possible.  About 37% of current retirees stopped working earlier than they planned.  That’s due to a variety of factors, including:

• Poor health: This is the biggest reason people retire early. For example, people who had jobs that required a lot of physical activity (construction, factory work, law enforcement, etc) may not be able to continue in those jobs until age 67 or 70.
• Layoffs/Unemployment: Age discrimination is real. Older workers with higher salaries are often let go during economic downturns. They also have more trouble finding new positions with the same pay and responsibility.
• Caregiving: Middle-aged adults often find themselves “sandwiched” between their responsibilities to their children and elderly parents. Something has to give, and it’s often one spouse’s full-time job. This particularly affects working women in their 50s, who account for 60% of family caregivers.

When retirement comes earlier than expected, finances suffer. You get less money per month if you begin taking benefits before age 67, so you may have to dip into savings to make ends meet. The average life expectancy of someone who makes it to age 65 is 20 years. At age 75, life expectancy is another 12 years, to age 87.  What happens if you run out of savings at age 80?

You’re Losing the Value of Compound Interest

Ideally, you should have enough saved for at least 30 years’ of retirement. That’s a lot of money, so the earlier someone begins saving, the better. Compound interest is like free money. Just look at the difference if you begin saving earlier rather than later.

Assuming a 6% annual return, compounded monthly:

• Save $500/month beginning at age 25, and retire with $1.1 million at age 67.
• Save $500/month beginning at age 35, and retire with $587,000 at age 67.
• Save $500/month beginning at age 40, and retire with $437,000 at age 67.

27% of Americans say they’ve dipped into savings to support their adult children, and 8% are planning to delay retirement because of it.  If your children depend on you for support now, you likely can’t depend on them for help in retirement. Cover yourself and your own retirement needs first.

You Haven’t Calculated the Hidden Costs of Supporting Adult Kids

Poet Robert Frost did say: “Home is the place, when you have to go there; they have to take you in.” However, he didn’t say that you get to live there forever.

In 2017, 48% of post-college Millenials moved back in with their parents. The “boomerang kids,” those who move back home after college, divorce, job loss, or other setback, cost more than you think. The estimated cost of food and car insurance for a 20-25 year old who moves home is $4,980/year.

If the parents are about 50 years old, it’s reasonable to calculate how much interest that money could have earned in a retirement account over a 20-year period. With those parameters, the money would more than triple to nearly $16,000 if earning a modest 6 percent return in a retirement account.

If an adult child remains at home for three years, the actual costs would triple to about $9,960, which could grow to more than $31,000 if given 20 years at 6 percent interest. That child living at home for five years will cost about $24,900, which would grow to more than $61,000 if given 15 years at 6 percent interest.

Many American households are on a shaky financial footing already:

• 20% aren’t saving anything for “retirement, emergencies, or other financial goals.”
• 40% say they wouldn’t be able to cover an unexpected $400 expense.
• 61% don’t know how much money they’ll need in retirement.

The additional burden of supporting adult children can make the difference between a secure retirement and one filled with financial stress and worries.

Start Setting Boundaries

Every parent wants the best for their children. You never stop worrying about them and wanting to take care of them. But a huge part of being an “adult” is being self-sufficient. Here’s how to gently start pushing your children out of the nest:

• Be honest with your kids about your financial situation. In most social circles, that’s a taboo topic, but this is family. The “Bank of Mom and Dad” can’t stay open forever.
• Bring your financial adviser into the meeting. Having a third person (a neutral expert!) can make the topic less emotional and more practical. Review our tips for finding a financial adviser you can trust.
• Be specific when you offer to help. It’s hard to get settled right after college because “start-up costs” pile up quickly. Limited-time, specific offers like “we’ll help you make the security deposit on your own apartment” or “we’ll keep you on our insurance until you find a job” or even “here’s X amount of money to get some furniture, a work wardrobe, etc.” are fine. But if you offer to chip in $500/month to help them out, it may quickly become a line item in their budget – like an allowance – instead of a favor.
• Make it a loan. Too many times, a “loan” from parents is really a face-saving way for adult kids to accept money from their parents, and most parents are reluctant to press for repayment. Consider putting the terms in writing – this is where the financial planner can help – and getting signatures. That may sound extreme, but remember: it’s your retirement on the line.

If you still have minor children living at home, learn why it’s important to teach financial literacy from an early age. That early education may forestall problems later in life.

Remember: it’s okay to help your adult children! For years, wages have been stagnant while cost of living has risen. So help if you can, but only after you’ve taken care of your own needs in retirement.

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