Is Enabling Your Children Endangering Your Retirement?
Updated on May 04 2018
Many American households are having trouble saving for retirement and enabling grown children is one of the main culprits.
You may not think of your grown children as an expense, but the reality is that even after a child has left the house, they can still be expensive. Your retirement finances and savings are a delicate balance of fortitude and dedication, and children tend to be many parents’ weakness when it comes to “saying no.”
Putting Your Future Finances In Jeopardy
Helping your children isn’t a problem if you have the financial resources to do so; but if you are continually putting your retirement wealth savings and lifestyle in jeopardy, you have a problem – and many Americans have not saved enough for retirement.
In fact, according to data sets from survey responses to key retirement savings benchmarks and savings rates from J.P. Morgan Asset Management and Census Bureau, 74% of Americans are behind on their retirement planning. The same survey and data sets showed that 1 in 3 Americans has saved $0 for retirement.
The Retirement Risk of Having Kids
Not surprisingly, having children can make it harder to save for retirement as it can be a challenge to max out your 401k and IRA contributions as your children are growing, you’re juggling work and money is tight. Middle-income, married-couple parents can expect to spend about $233,610 on their bundle of joy through age 17, according to the U.S. Department of Agriculture (USDA) – and that doesn’t include the cost of a college education. On average, parents spend about $12,980 annually – or $36 a day – per child on housing, childcare and education, food, transportation, clothing, healthcare and other miscellaneous expenses.
After children are done with college, the expense continues for many American families. In fact, baby boomers with financially independent adult children who don’t support anyone else are twice as likely to be retired, according a survey of 5,500 U.S. households by the market research firm Hearts & Wallets. Only 21 percent of boomers who support adult children are fully retired, compared to 50 percent of boomers who don’t support children or other extended family members. Boomers who support adult children are also more likely to report financial anxiety.
If you are constantly providing financial assistance to your grown children or grandchildren, here are tips to help you gain control of your finances:
1. Say “No”
Tightening the purse strings should, ideally, happen when kids are young so that enabling financially doesn’t become a habit. If your adult child is constantly asking for money help, you don’t have to provide assistance every time they request help. It’s necessary to set financial boundaries — and the sooner, the better.
Consider that sacrificing financially for your children when they are 25, 35 or even mid-life can impose a significant burden on your ability to retire. Keep in mind that too much financial support could be preventing your grown children from becoming self-sufficient.
2. Create a Legal Agreement
People are sometimes less likely to repay family members than they are a bank, which is why enabling your child financially could really impact your own retirement savings. One option to prevent this from happening is to act like a bank and have a lawyer draw up official paperwork. You can put dates when payments are due in the contract and there can be penalties, like interest, if payments are not made in a timely fashion.
3. Consider the Gift Tax Exclusion
Up to $15,000 can be given away in 2018 that’s free from any federal gift tax consequences. There’s no need to give them that much cash, but keep in mind that this is the amount that doesn’t have tax consequences.
If there’s a good reason to gift the money, for education or down payment help, for example, consider gifting the cash. If you’re baling them out, remember that they need to learn how to budget and be capable financially — for both your financial well being.
4. Get a Professional’s Opinion
Children ask their parents for mondy for a number of reasons. For example, they want to start their own business, need help paying for school or need extra cash for housing downpayments or maintenance issues. Just keep in mind that you will probably not get get the money back.
Get an opinion from a financial expert or someone not involved in the situation if it’s a large chunk of money. If you still want to loan your child money, set expectations to keep them accountable. Agree to a certain dollar amount and set a repayment provision; depending on the situation. You don’t want to give tens of thousands of dollars to your children when you barely have enough money to get to retirement.
Remember that you need to plan to fund your life for your post-working years. If you deplete your resources, who will help you? Explain this point to your child so they understand the ramifications, as well.
5. Blame Your Financial Advisor
Many planners and advisors don’t mind if their clients blame them for being strict with their money. Advisors will be the first people to tell you that continuing to give your children money will jeopardize your own financial future. Having a scapegoat my ease some tension, if there is any, in regards to financial tension and lending money. Find a financial advisor who can help with the situation.
6. Help Your Child Create a Budget
Teach your adult child the basics of finance if they don’t already have a good grasp. One practical way to do this is to create a budget together. Try not to make it overly complicated.
You can even use one of the free online budgeting sites like Mint or Personal Capital. A good ‘rule of thumb’ for spend budgeting is to allocate 50 percent of income for spending needs, such as housing, food and utility expenses; 30 percent for wants, such as coffee or hobbies; and put 20 percent into savings or investments each month.
Remember that subsizing your child will only lead to financial troubles for both of you. Connect with a financial advisor to get expert help.