“Greedy adult children have become rapacious consumers of their parents’ money!” Those are the stinging words of financial planner, author and speaker Jonathan Pond, who worries that millions of Baby Boomer parents have indulged their children, at their own expense. Of course he was not talking about your kids—your kids are perfect little angels! Although the economy is well into the recovery phase, nearly 63 percent of American families are still providing financial support to their adult children, according to research from insurance and financial services trade association LIMRA. Parents most often pay for their adult children’s cell phone bills, rent, student loans, car loans, credit card bills and even vacations. A separate study last year by the nonprofit American Consumer Credit Counseling found that a higher proportion of U.S. households provide financial assistance to adult children than support for elderly parents.
These numbers may be startling in and of themselves, but it is the next part that makes financial planners nervous: of those parents helping their adult children, 45 percent say it is hurting their retirement savings. Deb Dupont, associate managing director of LIMRA says parents “are providing considerable support to their children at a time in their lives when saving for retirement should be a priority.” Of course these parents know that they should be focusing on themselves, but doing so can be a tangled emotional ride.
Take the case of Joan, a 55-year-old widow, whose 31-year old daughter Mindy went through a nasty divorce and lost her job in 2012. Joan was more than willing to have her daughter move in and she even helped out with some expenses. But three years later, her daughter is creating difficult financial choices for Joan. While Joan would like to concentrate on retirement, she is worried that Mindy will not be able to make it on her own. “I was trying to retire by age 65, but that’s probably not going to happen now. It’s hard for me to draw the line with my daughter.” Unfortunately, Mindy has gotten a little too used to this “temporary” situation and is not clamoring to become financially independent any time soon.
The steps necessary to wean an adult child off of a parent’s gravy train require tough and often emotional conversations. Ideally, Joan would have had “the talk” before Mindy moved in, but that never happened. Now it is important for Joan to discuss her needs and expectations going forward. Maybe something like, “It’s been three years since you moved in and I was happy to help you out during this major transition in your life. But I think that you are more than capable to take control of your financial life and I want to help you develop a plan to help you get there.”
As Joan works on the plan with Mindy, she will likely have to ease her into full independence. That might mean that if the goal is to have her move out in six months (she must choose a concrete date), she will have to develop a budget, which winds down the payment of expenses over time. Joan should reiterate that she will help guide Mindy through the process, but not to finance it. While she’s having these difficult conversations, Joan should also define when it's appropriate to ask for help in the future (a medical crisis or a job loss), but it must be an emergency, otherwise she risks getting caught up in the cycle again.
To accurately reflect the agreement, the plan needs to be in writing, it should be specific and both sides need to stick to it. I’m not saying that you shouldn’t help out your children in need, but you should be smart about the financial assistance you provide. Financial independence is a marker of adulthood - help and generosity differ from unhealthy dependency.