The millennial generation gets a bad rap. But as a service provider, as an employer, and most importantly, as a father, I’ve seen firsthand how talented, creative, thoughtful, and capable many of today’s young people really are.
I’ve often seen parents, who have the best intentions, provide ongoing financial support to their adult children that comes at the expense of the parents’ retirement savings. There’s a delicate balance here between our desire as parents to help our children and our need to protect our retirement nest eggs.
If you’re struggling to find the right balance, here are a few thoughts to consider.
1. Your kids have options that you don’t.
One common reason that parents dip into their retirement funds for their kids is to help with major life transitions: college tuition, a new job, moving out of the family home, weddings. Plus, many soon-to-be retirees are wary of debt. They’d rather help their kids with cash than have them rack up interest charges.
But young people have options that you won’t have in retirement. Your kids can rent an apartment for a couple years while saving up for a home purchase. Your kids can lease a car instead of buying, or use public transportation and ride-sharing services. Your kids can take out student loans and repay them over time.
On the other hand, once you stop collecting a paycheck, your options are limited to whatever you have in your retirement accounts, a pension (if you’re lucky!), and Social Security. But what if these funds don’t cover your expenses and any emergencies that pop up? There’s no quality equivalent of a “student loan” for retirees that I know about.
Besides, not all debt is bad! Managing debt responsibly and building credit will be an important part of your young adult’s journey to financial independence.
2. Minor generosity adds up.
But I’m only giving my child about $20 a month by letting him stay on the family cell phone plan.
I don’t really use that streaming video service, but it’s only $20 a month and my daughter likes it.
It’s just a gas station credit card to help him get to and from work, it’s less than $100 every month.
Here’s the thing about giving your kids “only $20 per month”: the math can get ugly. $20 times 12 months times ??? years adds up to hundreds of dollars awfully fast! Or even thousands, depending on how many of these smaller expenses you’ve been picking up.
If you can afford those minor gifts with no impact to your long-term savings, then it’s a matter of personal preference.
But are those monthly costs the reason you’re not maxing your Roth IRA or 401(k) for the year? Or is an adult child still living at home, contributing nothing to household expenses, and chipping away at the cash pool you could be using for catch-up contributions after age 50? If that’s the case, please reconsider, and ask yourself …
3. Do you know your child’s monthly budget?
Money is often a verboten topic between parents and children. But if you’re contributing to your child’s financial stability in even a small way, you have every right to ask how they’re spending their money.
This line of inquiry can lead to an uncomfortable discussion, but the outcome can be positive for both you and your kids. Your child might not realize how the small things you’ve always provided are little sacrifices that impact your retirement. Maybe your child doesn’t have a budget, and as you help him or her set one, you slip in a few wise words about including automatic savings and Roth IRA contributions.
Sometimes the most difficult conversations are the most important. You might even discover …
4. Other ways to help.
Money might be the quickest way to stabilize your kids financially, but is it the best way? What’s the real reason that your adult kids are still depending on you? How else can you help?
Is your child underemployed? Is there someone in your personal or professional network who could help him or her find a better job?
Does your child need a crash course in financial literacy? Many of our clients bring their adult children to Keen Wealth for a consultation with one of our fiduciary advisors.
But if your kids are just used to something that you’ve always done, like paying for a legacy cell phone plan, then it’s time to cut the cord. Otherwise …
5. When does it end?
If you avoid confronting your adult child about any ongoing support you’re providing, he or she might grow dependent on your money, and you might become resigned to giving it. And as you deplete a portion of your retirement, your child never learns to fix his or her underlying financial issues.
Your generosity shouldn’t be open-ended. If your adult child can’t afford minor monthly expenses, then maybe he or she should learn to go without HBO or a brand-new cell phone every year. If you decide to give your child a more significant amount of money, treat the transaction like a loan. Set terms and conditions, a payback schedule, maybe even an interest rate. An adult child who needs to move home also needs a timetable and an exit strategy.
That kind of “tough love” turns off many parents. They’d rather just sign a check and avoid confrontation.
But if your generosity to your kids ruins your retirement, who’s going to sign a check for you?
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.