Bankrolling Adult Kids Imperils Boomer Retirement
Financial advisers worry that families don't realize how much they're spending on their grown children.
Economist Barry Bosworth was surprised to realize how much he and his wife still spend on their two adult sons, long after they put them through college.
Although the expenditures are mostly a lot of little things that add up each month, the couple also helped their sons buy homes and cars after they had secured doctorates but were earning low salaries in the early days of their careers.
"Children are still our largest expense, well after they leave home," said Bosworth, a senior economics fellow at The Brookings Institution.
The amount that Americans spend on their adult children during years when they should be concentrating on saving for their own retirement worries some financial professionals.
Many parents can't see how paying down their children's debt or making mortgage payments for them could be hurting their own future, advisers said.
"Taking care of your adult children is one of those things that you don't expense for," said Steve Hamant, a financial adviser affiliated with LPL Financial. "I have to make sure that clients understand that money that's flowing out at this point will reduce their retirement."
For many parents, even when they comprehend that the large checks they write for their kids may reduce their own future income, it is hard to deny them, Harnant says.
In fact, an Ameriprise Financial Inc. survey of 1,006 affluent baby boomers, conducted in December, found that 93 percent have provided some level of support to their adult children.
That rate isn't just a phenomenon that has occurred since the nation's economic recession. In a similar survey conducted in 2007, 92 percent said that they had helped their adult children.
Most of the money parents funnel to adult children is day-to-day spending coming from discretionary cash accounts rather than long-term savings, so the effect this could be having on retirement isn't as obvious, said Suzanna de Baca, vice president of wealth strategies for Ameriprise.
"If they aren't taking the money out of a retirement account, they aren't connecting the dots," she said.
The data suggest that parents are helping even more now than in 2007 with paying off loans and covering housing costs.
About 71 percent of baby boomers in the recent survey said that they are helping pay their kids' student loans and 55 percent said that they have allowed their adult children to move back into their homes and live rent-free. About 53 percent have helped them buy a car, and nearly half help with car insurance, the study found.
At the same time, just 24 percent of responding boomers said that they are putting away money for the future, down from 44 percent when the survey was taken five years ago.
It is even more of a concern, considering that Americans spend an average of $235,000 to raise a child to 18 and then many help with college, which costs an average of $17,131 a year for an in-state four-year public school and $38,589 annually for a private-college education, according to The College Board.
According to advisers, parental support is lasting longer than it used to because of the flailing economy and high unemployment rates.
"People are especially sympathetic about helping their children now, given the economy," said Donald Nicholson Jr., a financial adviser at Donald W. Nicholson & Associates Ltd.
Parents aren't just helping children during their 20s and 30s as they establish careers.
Nicholson said that he has clients whose 40-something children are moving home after getting divorced and needing help getting back on their feet.
In addition to threatening retirement income, such financial support can have another negative consequence in families that have more than one child, de Baca said.
Many times providing support to one child and not others who may be taking care of their own finances creates resentment, she said.
"One of the biggest problems I hear about involves the inequity of support between children," de Baca said.
It also is hard for parents to know when enough is enough, and they are hesitant to talk with their kids about becoming more independent.
"Parents feel a lot of pressure to continue providing support," de Baca said.
Bosworth said that both his sons, now in their 40s, are doing well in academia, and he expects to be spending on grandchildren soon.
"I remember advising my sons to make their avocation their vocation, but I think that now I'd tell them that a little bit of money wouldn't hurt either," he said.