Should You Help Out Your Adult Kids Financially?
Of course you want to assist your kids, but reaching into your own financial future could harm prospects for you both. What can you do?
There is nothing more important than your kids. You don’t need anyone to tell you that. But when and how is it appropriate to help your kids financially? This is a quandary that many parents face.
You Are Not Alone
A recent study by PEW Research Center shows that half of parents are still helping their adult kids out financially. Obviously, we have just come out of the devastating pandemic in which many people lost their lives and their jobs. According to a Savings.com survey, 26% of parents say that they have had to give kids more during the pandemic, which is not a surprise. Our kids have been slammed with financial roadblocks, such as a precarious job market until recently, high student loan debt and expensive housing costs.
I’m not going to focus on the parents who stepped up to the plate for their kids during these trying times. That is exactly what should have been done. I’m going to focus on parents who still reach into their pockets and their own financial future to support their adult kids.
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This is not a new situation. Even prepandemic figures show similar results. A PEW Research Center study from 2018 found that before the pandemic, 45% of young adults ages 18-29 received financial support from their parents.
How Much Are Parents Shelling Out?
The Savings.com survey found that, on average, parents are giving their adult children about $1,000 per month for expenses like food, health and auto insurance, rent, cellphones, tuition and travel.
Also, as of the end of last year, over half of young adults still live with their parents. They are known as the boomerang generation. This is the highest rate of returning young adults that has ever been experienced, even including during the Great Depression.
You know how expensive it is to have other mouths to feed. Your new down-sized budget may not include extra costs to have kids camping out. It’s estimated that the average cost of housing an adult child is $459 a month, but I think that is low. That number doesn’t count the debt that parents may be helping with and all of the sneaky emergency expenses — the dog gets sick, the tires need to be replaced, the computer breaks. You know what I mean.
The real rub is that over 60% of adult kids are not paying rent to their parents. They are helping with chores, however.
How Does Being a Supportive Parent Affect You?
It really affects parents. The math is simple. Parents who are working and supporting their adult children “… spend 23% more on their kids’ expenses than they do contributing to their own retirement or savings,” according to the Savings.com survey. On average, when they help out, they are contributing almost $500 less to their own retirement.
Older adults are working longer than they used to. To be fair, helping out adult kids is part of the reason for this, but other reasons also apply, such as high inflation, living on fixed incomes, Social Security inadequacies and the dip in the stock market. About half of seniors rely on Social Security for the majority of their income, and these benefits are not sufficient to live on. Nearly half of seniors expect to work after retirement.
Parents Helping with Kids’ Student Loan Debt
Over 3.5 million parents have borrowed money to pay or help pay for their kids’ education. The average initial balance is nearly $29,000. Some parents have been paying off these loans for decades. It’s hard to get in front of the payments, in many cases, as interest rates increase.
As we know, through the new student loan forgiveness program, there will be up to $20,000 forgiven for Pell Grant recipients making under $125,000 a year and up to $10,000 in relief for other federal borrowers under the same income cap. Currently, parents who took on PLUS student loans for their kids are eligible for up to $10,000 from the Biden administration’s loan forgiveness program. Some Democratic lawmakers are asking for the full $20,000 relief to be offered to parents whose kids are Pell recipients.
College is seen as an investment in a child’s life. The hope is that when they graduate, they will reap the financial benefits and have enough income to pay off their debt. But when parents borrow to help out their kids, they are not looking at any hope of higher income and will remain on the hook if their kids don’t pay the loans.
Let’s Look at the Numbers
The average 60-year-old has about $172,000 in retirement savings. But the rub is that the cost of a comfortable retirement means having retirement savings of about $883,800. That will throw off about $50,000 a year in income. That means that about half of retirees risk not having enough to live comfortably in retirement. Don’t be deceived by the numbers. There are a lot of wealthy people who skew this number and make it look better. Also, the pandemic has negatively impacted retirees. According to a report by the New School’s Retirement Equity Lab, an estimated 3 million more people will fall into poverty during retirement.
Most parents would not change their behavior of helping their kids — because they’re parents, and that’s what parents do. The issue is that pulling money out of their own retirement, delaying retirement or continuing to work to help the kids might not actually help in the long run.
What Can You Do to Help Your Kids Out?
Obviously, you want to be there for your kids — they are your kids. But the financial realities of helping them can be devastating for your financial future. You may even be setting yourself up to be a financial burden for them in the future. Draining your financial future may not be the only answer.
Here are some strategies to think about:
- The talk. Really have an honest discussion with your kids explaining that you need to save for your retirement. Have this discussion using real numbers. Lay out what you need for your future and what you need to save each month. Include the estimate of Social Security. Also talk about how you expect to reduce your expenses in retirement. You may downsize, take fewer vacations, live with a roommate, etc.
- Make it real. Make your contributions of paying off your kids’ debt by establishing real loans with them with real repayment schedules. It’s hard to say that this is not a gift, but a loan, but your kids need to understand what this will mean to your future.
- Gift it. Instead of taking on student loans or other loans for your kids, consider annual gifting. If you can afford a portion or the whole amount, the IRS allows an individual gift of $16,000 for 2022 to any recipient without tax consequences. A larger gift can also sidestep tax liability if it counts against the lifetime estate, which is currently $12.06 million for individuals.
- Cash it out. There may be some cash that you were not aware of. For instance, when your kids were young, you may have purchased cash value life insurance, a form of permanent life insurance. This type of policy is whole or universal insurance that can accumulate cash over time as you pay your yearly premiums. You may have purchased this when your kids were young and you wanted to make sure that they had enough to live in the event of your death. You can withdraw cash from the policy, which could reduce the eventual death benefit in an insurance policy. If you cancel the entire policy, you will receive all of the accumulated cash.
I’m never suggesting that you tell your child who is in need that you have other priorities. I’m suggesting that you have an open and honest discussion about how you can partner with them and make decisions together.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Neale Godfrey is a New York Times #1 best-selling author of 27 books, which empower families (and their kids and grandkids) to take charge of their financial lives. Godfrey started her journey with The Chase Manhattan Bank, joining as one of the first female executives, and later became president of The First Women's Bank and founder of The First Children's Bank. Neale pioneered the topic of "kids and money," which took off after her 13 appearances on "The Oprah Winfrey Show." www.nealegodfrey.com
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