Don’t let your adult kid drain your retirement
Long-term effects could be costly
One of the biggest money drains for Americans nearing retirement may be their grown children. Four out of five parents provide some type of financial support for their adult offspring, and they spend twice as much on them as they do saving for retirement. Even more disturbing, half of parents are willing to draw down savings, and a quarter would go into debt or pull from retirement savings to support kids who’ve left the nest, according to a new survey from Merrill Lynch and Age Wave, a research firm, which provided the results to USA TODAY exclusively.
The assistance can derail parents’ retirement plans if their generosity is too much, financial experts warn, threatening their ability to live the lives they imagined during their golden years.
“It’s heartening in one aspect, because it’s done out of love,” says Dennis Nolte, vice president at Seacoast Investment Services in Winter Park, Florida. “But if the parents have altered their retirement projections, does that mean the adult child will take care of mom if something goes wrong? Hopefully, there’s no free lunch there.”
Weddings, rent, vacations on mom:
Parents are helping their chil- dren in big ways and small, from funding weddings, down payments and college, to covering groceries, cellphones, rent and even vacations for their adult children, according to the Merrill Lynch survey.
Alexander Koury, a financial planner in Phoenix, says one of his clients is shelling out $2,000 a month for their daughter’s rent in New York. The daughter contributes another $1,000. The arrangement is only supposed to last a year when the daughter plans to move away from the city. But, in the meantime, the retired couple’s yearly budget of $75,000 is
stressed.
“They are giving her $24,000 a year, raising their total annual expenditures to $100,000,” Koury says. “That doesn’t give much room for unexpected expenses.”
Frustrated parents
One of Nolte’s clients – a newly retired 65-year-old woman – has to cut her monthly budget by $2,000 for the next nine months after she gave her 34-year-old daughter $400,000 for a custom house. “She was not fine with that,” he says.
Her tax bill – $50,000 in total – also took her by surprise. She had taken the money from her 401(k), which put her in a higher tax bracket. “Of course, we had to take another distribution just to pay for the taxes,” Nolte says.
It’s the long-term consequences that worry financial planners the most.
One couple in their late 50s – clients of Ken Nuttall, a certified financial planner in New York – wanted to retire in six or seven years. To do that, Nuttall says they needed to sock away about $2,200 a month.
But the couple is burdened by $350,000 in private loans they took out to put their two children through college and graduate school. Now they pay $1,700 a month toward the loans and contribute just $500 toward retirement. The loans won’t be paid off until the parents are 76, and they won’t be able to retire until they’re 70 or older.
“The gentleman wasn’t happy about that,” says Nuttall, who noted that the children – a lawyer and therapist – weren’t contributing anything toward the payments. “I know parents want to do something to help their kids, but they will be paying for it for the rest of their lives. Literally,” he said.
Tips for parents
Financial planners stress that you can help your children financially without it becoming an undue burden.
Missy Spickler, a Merrill Lynch adviser, often helps the children of her clients create budgets so they can make ends meet on their own.
“I can’t tell parents to cut their kids off,” Spickler says.. “So, I work both sides of the fence.” Other steps parents can take:
❚ Open up: Be frank about how much you can contribute. Show them your monthly budget, your anticipated expenses and how much extra you can give before it starts to eat into your savings.
❚ Lend, don’t give: If your child needs money for a specific purchase, let them borrow and pay you back in affordable payments. “I have it automatically deducted from a kid’s bank account,” Spickler says. “And it’s usually an interest-free loan.”
❚ Ask for help: If your child moves back home, they should help out with the regular expenses such as utilities, groceries and possibly a small rent, Spickler says. ❚ Plan ahead: If you want to help pay back student loans, contribute to your child’s wedding or give a lump sum for a down payment on a house, start planning early.
For instance, Nuttall’s clients could have gotten federal loans in their kids’ names at a lower interest rate and helped pay them off. They also could have saved while the children were still in school, so they were in a better financial position when the loan payments started.
“It’s easier to prepare than repair,” Nuttall says.