Do you know the difference between lending your adult child a helping hand and feeding an unhealthy dependence on your generosity? Can you manage access to the Bank of Mom and Dad so that it doesn’t destroy your family’s financial well-being?
Turns out these are questions most of us should be asking. Bank of America Merrill Lynch reports that 62% of people age 50 and older helped a family member financially in the past five years (the average gift was $15,000), and the vast majority weren’t prepared for the expense. Researchers from Boston College’s Center for Retirement Research found that empty nesters aren’t stepping up their retirement saving as much as expected—and as much as they need to—once the kids are gone. The reason isn’t clear, but one speculation is that parents continue to support kids financially after they’ve flown the coop. And many 18- to 34-year-olds aren’t even leaving. Among that cohort, living with parents is the most popular living arrangement for the first time in more than 130 years.
Of course, there are times when kids need to return home to regroup. “That’s what family’s about,” says Kristen Armstrong, a family coach at Ascent Private Capital Management. But assistance should help foster independence, not the opposite. And it can be difficult to recognize a dysfunctional pattern.
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Parents often believe the most recent request for money will be the last, the one that finally launches Junior on the path to success. But money is a powerful reinforcer, write psychologist and financial planner Brad Klontz and financial planner Anthony Canale in a recent issue of the Journal of Financial Planning. Receiving money for the asking reinforces the behavior of asking, and it can ultimately lead to dependency.
Unintended consequences. Financially dependent adults often lack creativity, drive and passion. Or they become paralyzed by too many choices, unable to stick with a job or settle on a career. They may pursue multiple degrees in a variety of fields. “We tell our kids to follow their passion,” says Ann Minnium, a financial planner in Scotch Plains, N.J., but “parents are footing a lot of their expenses, killing their own retirement.” Moreover, “you’ve set a precedent that becomes an expectation,” she adds.
The keys to raising financially independent adults are education, mentoring and age-appropriate experience managing money, says Michael Farrell, managing director of SEI Private Wealth Management (see 10 Things Every Kid Should Know About Money by Age 18). A piggy bank when they’re little becomes a frank talk in high school about in-state tuition versus the cost of a private school. If you drive an eight-year-old car because you choose not to buy a new one, or vacation in one place rather than another, discuss those trade-offs with your kids. “We don’t burden them with all of our financial struggles, but we should share the decisions we’ve made,” says Farrell.
If you’re having trouble launching a young adult, brainstorm ideas together so everyone is on board with the plan you come up with. If you agree to finance your child’s education, job training or even counseling, pay the school or service directly. Or condition ongoing help on successful outcomes along the way. For example, if you’re willing to pay off some of your child’s student debt, make it contingent on your child getting a job and saving a specified amount over a certain period. Charge rent to a boomerang kid who’s back home, and save it to help with a security deposit on an apartment. Instead of enabling or abandoning kids, says Farrell, “show them how they can do it on their own.”
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