It starts innocently enough: a check to cover the rent after a job loss, an invitation to move back home after earning a degree, an offer to take over student loan payments until a new graduate can land a better-paying job.
It’s natural for parents to want to lend a hand as their children make the sometimes-bumpy transition to adulthood, especially for those whose educational or early-career trajectories were disrupted by the pandemic. But financial planners say these good intentions can all too easily spiral into dependency, creating and perpetuating expectations of ongoing support that can erode the financial security that parents spent their careers building.
“It’s going to result in their personal retirement not meeting their needs,” said Bryan Hodgens, senior vice president and head of research at LIMRA, a financial trade group.
In a survey commissioned by the group, 17 percent of middle-aged Americans with more than $150,000 in investable assets said they supported children 26 or older, even when it jeopardized their own financial security. More than half of respondents who support adult relatives said doing so cut into their retirement savings. In another LIMRA survey, 23 percent of respondents said “boomerang” children, or those who have moved back home, had negatively impacted their retirement savings.
When helping hurts
The first thing parents need to understand is that this dynamic isn’t a moral failing, said Brad Klontz, a Boulder, Colo., financial psychologist and an associate professor at Creighton University’s Heider College of Business.
“I don’t look at it as a failure in character. Behavioral reinforcement creates it,” he said. “Money is one of the most powerful reinforcers of behavior.” Giving creates a feedback loop that motivates people to do what they were doing, such as not working, rather than pushing them out of the slump.
Experts who work at the intersection of financial planning and psychology acknowledge that today’s young adults have faced multiple setbacks: the pandemic, skyrocketing housing and education costs, and an entry-level job market eroded by advances in artificial intelligence.
Parents are at a loss for how to help them cope, said Susan Zimmerman, co-founder of Mindful Asset Planning in Apple Valley, Minn. Good intentions often backfire when parents rush in rather than let their children struggle and succeed on their own terms.
“There’s a slippery slope when you start giving money without any expectations attached to it,” Ms. Zimmerman said. What was a rescue in an emergency can evolve into long-term enablement, and parents can inadvertently reinforce dependence, she added. “When it drags on for five to 10 years, that’s no longer a rough patch.”
This stifles the young adult’s development and increases parents’ financial strain. Continual giving is a huge risk factor for outliving your savings, Dr. Klontz said.
While sharing a family cellphone plan may not break the bank, more significant support — paying for housing, grandchildren’s day care, graduate school and cash “allowances” — is not uncommon among affluent parents, experts say.
“What we see much more commonly are varying degrees of parents providing ongoing financial support to young adults or not-so-young adults,” said Matt Lundquist, founder and clinical director of TriBeCa Therapy in Manhattan.
“It absolutely can be a cause of stress when it’s prolonged,” he said. “It can become especially complicated when the adult child is partnered and parenting themselves” and no longer a young adult by any typical definition of the term — say, in his or her 30s.
“We’ve stretched the definition of that adjective,” Mr. Lundquist said.
‘Think about you’ (and taxes)
Financial planners say many parents are reluctant to pare back support until they see the future effect on their finances quantified in a spreadsheet or an investment withdrawal schedule.
“They have to see how taking the money out can be detrimental to their goal,” said Malik Lee, managing principal of Felton and Peel Wealth Management in Atlanta. “Then, we talk about that.”
Part of the conversation includes helping parents figure out how to balance their near-term cash-flow needs with the long-term goal of preserving assets that will generate income when they stop working, Mr. Lee said.
Some parents support adult children by cashing out investments. When they do that at an unsustainable rate, the first step is to stanch the bleeding, said Amy Miller, a senior vice president at Wealthspire Advisors, a wealth management firm, in West Hartford, Conn.
“What we say to parents is, ‘You need to think about you,’” she said. “We show them their projected cash flow over the course of their retirement. We can quantify the difference, and I think that’s a big eye-opener.”
One of Ms. Miller’s clients is supporting two children in their 30s who live in New York City, she said. Over the long term, this can have a real effect on parents. “They’re sacrificing certain aspects of retirement,” she said.
Even a child who is living in his or her family’s home without contributing to expenses can burden parents via higher utility and grocery bills. In some cases, parents who want to retire may be reluctant to downsize if it means effectively evicting their son or daughter.
A large one-time gift like a down payment on a home or graduate school tuition, even if intended as a loan, needs to be approached carefully. If parents are pulling that money out of the market, that means forfeiting the returns it could earn, Ms. Miller said.
If possible, she said, take the funds from a taxable account, which is likely to cost less in taxes than a distribution, taxed at ordinary income rates, from a traditional 401(k) or traditional individual retirement account.
“If they’ve got all this tax-deferred money, it can get really expensive, because they are paying not just to support their kid but are paying the taxes on that,” she said.
Dr. Klontz advises clients to figure out what they can afford on their annual income, not their investments or other assets, if they want to give their grown children money regularly.
5 Tips to Cut the Cord
Experts say it can be a long journey for parents trying to help their adult children achieve financial independence. The following advice can help.
1. Stick to your guns. Saying you’ll turn off the money tap is one thing, but following through is another. “It’s not a negotiation,” Mr. Lundquist said. “I think it’s important that the parent be the parent.” In a two-parent household, both need to be on the same page.
Dr. Klontz advises parents to prepare for pushback, especially when both the amount and duration of support are significant. Rehearsing a reply can be helpful, he said.
“When you actually cut them off, you get what we call in psychology an extinction burst,” Dr. Klontz said. “It’s like an adult tantrum, essentially.” Guilt, manipulation and even threats are not uncommon. Stand your ground.
2. Step down gradually. Most parents don’t want to cut off their children cold turkey. “One way is to titrate support, so you’re reducing it over time,” Dr. Klontz said.
Another way to reinforce behavioral changes is by framing future gifts or bill payments as loans, and tell children you want to be paid back. That sets parental expectations of responsibility, Ms. Zimmerman said.
3. Use specific language. When discussing the topic, avoid vague pronouncements like, “We’ll need to cut back,” since those can sow anxiety without clarity, Ms. Zimmerman advised. She recommends that parents say exactly how much money they’re willing and able to provide, and on what timeline.
4. Get it in writing. It doesn’t have to be legally binding. Just writing down a plan for gradually withdrawing financial support conveys concrete expectations and commitment, Ms. Zimmerman said.
5. Enlist professional help. Mr. Lee said clients often asked him to break the news to their adult children. “I get deputized to do it,” he said. While parents may be afraid of creating friction, he said, “I’m a little more direct.”
Delivering the message also gives him the opportunity to show the young adults how paying for rent, graduate school, day care or other big-ticket expenses is eroding their parents’ finances. “It’s educating and having that tough conversation,” he said. “Children look at their parents as a piggy bank.”
The post How to Tell Your Adult Kids the Bank of Mom and Dad Is Closed appeared first on New York Times.
