Financial Fitness


Parent Trap: Supporting an adult child will cost both of you

Posted at 4:22 PM, Dec 06, 2017

You can’t blame parents for wanting to help their adult children. But when they fork over cash for their kids’ daily living expenses, parents may jeopardize their children’s long-term financial success — and put their own retirement at risk.

Fifty-six percent of parents with children age 18 or older said they’ve paid for their adult children’s groceries, 40% have covered their health insurance and 21% have paid for rent or housing, according to a new NerdWallet survey, conducted by Harris Poll, of 656 parents with children age 18 and older.

That’s not all. Parents have also helped their adult children in these ways:

  • 39% have paid a cell phone bill
  • 34% helped out with car insurance
  • 32% paid for clothing
  • 20% paid for entertainment

When helping starts to hurt

Helping out adult children “isn’t necessarily a bad thing,” says Julie Fortin, certified financial planner and financial behavior specialist with Northstar Financial Planning in Windham, New Hampshire.

Of course you’ll try to help your child in an emergency — but be careful that short-term aid doesn’t become a long-term habit. That’s because setting up shop as the Bank of Mom and Dad can lead to two problems: One is that your child might become overly dependent on you for money. The other is that those payouts can jeopardize your financial outlook, Fortin says.

Shelling out small dollar amounts each month might not seem so bad, but they can add up to a surprisingly big hit to your potential savings. Say that for three years you spend $95 per month on groceries for your adult child. That’s the average amount someone under 25 years old spends on groceries each month, according to the U.S. Labor Department’s Bureau of Labor Statistics.

If you’d invested that money instead, that seemingly small handout would be worth more than $11,600 to you in retirement. That figure assumes you’re 44 years old when you start paying for those groceries, you retire at 67 and earn a 6% annual return.

» Check out the NerdWallet study, which includes a calculator to test how much your own child’s expenses may cost you in retirement.

Or maybe you kick in some cash for your child’s cell phone. That’s generous of you, but it might be short-sighted. Just $28 per month over three years adds up to a loss of about $3,400 once you retire, given the assumptions as above.

But the real concern comes from bigger ticket items. If you pay your adult child’s rent for three years, you’ll slash your potential retirement nest egg by about $48,000. That’s assuming a monthly rent of $392, the BLS’s average for someone younger than 25.

Reaching financial independence

Even if your bank account can withstand these headwinds, giving money isn’t a great way to teach your child financial savvy.

“It’s actually reducing the child’s own personal success,” says Susan Zimmerman, a chartered financial consultant, marriage and family therapist and co-founder of Mindful Asset Planning, in Apple Valley, Minnesota.

Luckily, there are ways for you and your child to achieve a healthier relationship with money — one in which your child gains financial independence and you get your retirement savings on track. Consider these steps:

1. Figure out why

The first step is identifying why you’re providing the support. Helping kids is “virtually always born out of love and concern,” Zimmerman says.

Often, a secondary driver is a desire to keep your child happy. “What makes it hard for parents to stop is the same thing that made it easy for them to start: They have a need to please that child,” Zimmerman says. “They have an intolerance for the child being displeased or even angry.”

Wanting to please others isn’t necessarily wrong, but “you can end up having too much of a good thing,” she adds. Keep that in mind as you take the next steps to trim back your financial aid.

Here are more insights on how to avoid being a financial rescuer.

2. Get clarity on your own finances

Before explaining the new arrangement to your adult child, figure out where you stand in terms of retirement savings. If you understand your money picture, you can tell your child exactly why you need to cut back. Plus, it’s a good way to model smart financial behavior.

3. Have the conversation

The next step is to talk with your child. This could be a touchy topic, so give him or her fair warning, Zimmerman says. For example, when you’re setting a date to talk, you could say: “We have a topic we need to discuss with you, because it’s causing us worry and difficulty in our own financial life.”

Once you’re together, explain why your financial assistance will need to stop. For example, Zimmerman suggests saying something like this: “We calculated our income needs for retirement, and we’re falling short. That’s why we need to start preserving the little bit of excess that we have.”

4. Create a timeline

Give your child some time to prepare by setting a date for when your contributions will end.

5. Offer other types of support

If your retirement savings are on track and you can spare the cash, consider using that money to invest in your children’s financial future.

“Sometimes the better thing for the wealthy parent to do is to start connecting those children to the many resources that exist now: career counseling, life coaching, financial counseling,” Zimmerman says.

That way, she says, you can tell your child: “I want you to feel the joy of experiencing achievement and success, however you define it for yourself.”

Check out more retirement advice from NerdWallet: