Don’t put your nest egg at risk to help adult kids

Despite improving job prospects for recent college graduates, many are headed back to their parents’ homes to save money. They are not alone.

According to the Census Bureau, about one-third of 18- to 34-year-olds, or about 24 million, lived in their parents’ homes in 2015. And of the millions boomeranging back home, one in four, or about 2.2 million, neither attend school nor have jobs.

This was a real head-scratcher for me. How could these adults be doing nothing? More to the point, why are parents allowing the situation to persist? According to a recent Merrill Lynch retirement study, nearly half of Americans ages 50 and over say that they are “willing to overextend themselves financially to give their children a more comfortable life.”

The study also found that about half of retirees who gave money to family members felt they had an obligation to do so, and 80 percent of them said they felt that it was the right thing to do.

If you are flush in retirement and can afford to help out your kids, you might consider doing so. But I am concerned that many parents are putting their own financial futures at risk out of this sense of obligation. Some of these near-retirees have written to ask about the best way to assist their adult children. Here are a few examples:

Q: Is it OK to reduce my retirement plan contribution to help pay for the additional expense of having my son live with us?

A: No. Have him at least contribute to the groceries or rent.

Q: Which is a better way to free up cash for a down payment for my daughter’s purchase of a new home: a 401(k) or a home equity loan?

A: Neither. If you have cash available to assist, fine, but it is too dangerous to assume new debt obligations, unless there’s an emergency.

Q: Can I count on working a few extra years to help out my kids today?

A: No, because you don’t know whether your employer will want to keep you aboard or whether you will be able to physically do your job.

Each of these moves could derail your plans to have a comfortable retirement and live without fear of running out of money.

In the Merrill Lynch survey, 60 percent of respondents said that one of their greatest worries is becoming a burden (physically, financially and emotionally) on their families, so this is no small matter.

Presuming that you can afford to help out your child or children, there should be a clear conversation with them. Discuss exactly how you plan to help (reduced rent for living at home, help with paying off student loans), how long you can provide the financial assistance and — here’s the kicker — what you expect in return.

I recommend making it a requirement that your child create a cash flow and financial plan before you provide assistance. That might sound a bit controlling, but without it you may be enabling bad behavior that will set your child up for failure down the road. If you are providing a loan, then discuss the terms and determine a realistic repayment plan.

Parents need to strike a reasonable balance between being there for their kids and keeping themselves out of financial danger.

If you are flush in retirement and can afford to help out your kids, you might consider doing so. But …