The Real Cost of Funding Adult Children: Postponing Retirement

We love our kids. But when is supporting them financially a good thing, and when is it, well, not so good?

Nearly half of U.S. parents are helping their adult kids financially. In an AARP survey, the figure edged even higher, with 75% of parents providing some financial assistance to at least one adult child (age 18+). Another survey by Ameriprise Financial shows that 63% of parents cover ongoing expenses for children 21+, 76% help with big one-time expenses, and 36% worry about the impact on their retirement. Unfortunately, most parents agree — lending money to their adult kids is hurting their wallets.

The AARP survey also showed that parents provide about $7,000 annually, with a median contribution of $1,400. And while most parents (42%) offer support willingly, another 36% cite a mix of desire and necessity.

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While many surveyed parents make sacrifices to support their grown children, including 52% cutting back on living expenses, 27% postponing retirement and 39% struggling to afford necessities like bills and groceries, some question if there is an expiration date on helping kids financially.

Supporting grown children: a loving gesture or retirement risk?

Reasons why parents pay for their adult children vary. Ameriprise Financial states that 83% of supporting parents contribute to their adult kids’ monthly groceries, 65% help with cell phones, and nearly half (46%) pay for vacations. That same survey also points out that working parents contribute 2.3 times more to their adult children than to their own retirement accounts each month — creating stress and demanding lifestyle sacrifices

“Achieving financial independence as a young adult can be challenging, especially as they face high housing and education costs,” said Courtney Alev, consumer financial advocate at Credit Karma. “There’s nothing wrong with providing financial support to your adult children, but if it begins to have a negative impact on your own finances, it is probably time to set some guardrails.”

Know your limits and set boundaries

As a parent, it's important to understand your limits. It's better to make sure you can afford to help your kids financially and that doing so won’t break the bank or set you up for financial hardship in the future. Set boundaries and be willing to say no.

Dave Ramsey tells Kiplinger, “In addition to clearly communicating any expectations tied to the financial assistance you’re providing, make sure you’re assessing your own financial situation to ensure you’re not negatively impacting your financial goals, such as pulling from your retirement savings.”

Having healthy boundaries can teach children self-control and give them a sense of self-esteem. Besides, providing financial support without setting limits could keep your adult child from becoming financially independent later on.

Financial tips to help adult children without enabling

• Network on their behalf: Sometimes getting a foot in the door requires who you know more than what you know. If you have contacts in a field where your child has training, it could help them get their foot in the door of a career. Or help them find career development courses or certifications so they can learn a new skill.
• Don't Give Cash: Instead, match their savings. Match 50% of what they save toward a goal, like a car down payment. This builds good habits while limiting your outlay to $100 to $200 per month max.
• Work with them on budgeting: Have them use this budget worksheet to see where their money goes. Having a fresh perspective can help you both set spending and savings goals.
• Use rewards credit cards: Try putting your adult child's groceries or gas on your rewards credit card, then let them reimburse you monthly. Bonus: you pocket the rewards and they learn budgeting.
• Create a family loan: To teach adult children about loans, try lending your adult child $1,000 at 0% interest, repayable in 12 months ($83/month). Use a simple written agreement, which gets your money back and teaches responsibility.
• Anticipate emergencies: With more parents helping out their kids financially, you might want to get ahead of it, if you can. Open a high-yield savings account, where you can make smaller deposits now that build over time. You won't have to devote much of your financial resources if you start early, and that money is earmarked for any emergencies or needs that arise.

Should you financially help your adult children?

Lending money to your adult children is nearly always driven by love and a desire to help them power through today's tough economic times. While well-intentioned, it's also important to approach it with your eyes wide open and set firm boundaries to protect both your relationship and your long-term financial security.

Only lend what you can truly afford, so you're not jeopardizing your retirement savings, emergency fund or lifestyle. Set boundaries to encourage independence. Consider a smaller non-cash gift, like co-signing a loan, to help your adult children buy a home or car without risking your wallet.

Ultimately, the most loving choice of all will empower your adult child toward financial independence and self-sufficiency. If you're unsure how to proceed, consult a financial advisor who can help you decide how much is too much (if any at all) and tailor the decision to your specific situation.

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