Those of us who are parents understand that wanting to provide for our kids is about as natural as breathing.
When our kids are little, their lives are, quite literally, in our hands. As they get older, their dependence on us should diminish. But many of us in our 50s and 60s are still financially supporting children in their 20s, 30s, and beyond.
In this article, we’ll look at how this negatively impacts retirement plans and what parents can do to wean their children off their checkbooks.
How Financially Supporting Your Adult Children Hurts Your Retirement Plans
While their hearts are certainly in the right place, most parents admit that the money they give to their adult children would otherwise go toward their own retirement efforts. It’s not difficult to see the problems this could create down the road. If you don’t have money to live on during retirement because you’ve given much of it to your children, who’s going to support you? Those same children? Is that a burden they’ll be able or willing to take on? Is it a loss of independence you’ll be comfortable with in your older age?
You can see how your good intentions could be fueling a negative parent/child cycle of financial burden.
Keep in mind that the “damage” isn’t always obvious. Many parents will defend their actions with the old “it’s only $20 here and there.” But that $20 here and there for groceries can quickly turn into $200 for rent or a car payment. All of those handouts you’re not investing can quickly add up. Depending on the interest rates of certain retirement investments, you could be talking about the potential loss of tens of thousands of dollars in retirement funds.
Don’t get me wrong. I’m not judging anyone whose 20 or 30-year-old child still lives at home with them. In fact, that can show some excellent financial responsibility on the part of the adult child. But that’s only true if they’re helping with the household costs.
Let’s take a look at how you can address that and many of the other issues that come with financially supporting adult children.
How To Financially Support Adult Children The Right Way
Housing
When it comes to housing, there are usually two ways in which parents financially support their adult children. As mentioned above, many parents allow their adult children to live with them well into their 20s, 30s, or beyond. On the other hand, many parents pitch in with paying their kids’ rent.
As I said, there’s nothing wrong with an adult child staying at home with their parents, but they need to pitch in with the expenses. If the adult children are working, there’s no reason they can’t contribute to some of the bills. I encourage you to have a serious and fair discussion on just how large that contribution should be. When you’ve decided on that figure, I suggest setting up an automatic monthly deposit from your adult child’s checking account into yours.
If you’re financially supporting your adult child by helping with their rent, it may be time to make some tough decisions. First off, if you still have your own debt you’re trying to pay off (mortgage, credit card balance, etc.), it makes zero sense to be giving your adult child money for rent. Period.
Talk to them about moving into a place they can afford on their own, or maybe it’s time they move back home for a while. Just make sure to follow the advice above.
However, if you aren’t carrying any debt and you feel you absolutely must help with your child’s rent, be reasonable about it. Keep your contributions as low as possible. For example, it doesn’t make sense to give them $500 each month so your child can have their own apartment when $100 would get the job done if they had a roommate.
Insurance
Health insurance is one of the most common—and overlooked—methods of financially supporting an adult child.
Children under 26 are legally allowed to remain on their parents’ insurance plans. But that could be a serious monthly financial burden. Want proof? Just look at the difference in monthly premiums between individual, individual + spouse, and family plans on your particular insurance policy. There are some very affordable individual insurance plans for young people.
If you do decide to keep your child on your insurance plan and they’re working, they should at least contribute financially to their portion of the premium.
Cars
Plenty of parents help their child buy their first car when they’re still in their teens, but most adult children should be taking on vehicle purchases solo. However, I understand situations arise where a parent may need to financially support their adult child with the purchase of a car.
My rule when it comes to helping an adult child purchase a car is pretty simple: If they can’t afford to buy a car on their own, they ABSOLUTELY cannot afford to buy (or lease) a NEW car—and neither can you.
They need to be shopping for a USED car with the lowest possible monthly payments.
Loans
Another very common practice when it comes to financially supporting adult children is cosigning for loans. This is a practice I highly discourage and it’s for two main reasons.
First, you may argue that you’re only cosigning because your child can’t get the loan based on their assets or credit score alone. They’re going to make every single payment, right? But things happen. If your child gets sick, hurt, or loses their job, you’re still going to be responsible for those payments.
The second reason you should think twice about cosigning on a loan with your adult child is it could actually hurt them financially, in the long run. With your name attached, your child will technically qualify to borrow more than they would if they were borrowing solo. That could result in their taking on more debt than they can manage.
I understand that things can get tricky when dealing with family issues like those outlined above. But this is about the long game. Hopefully, honesty and logical thinking will show that a bit of tough love may keep both you and your adult children in a better position, financially, down the road.
Our Free Wealth Blueprint can help put into perspective what kind of financial position you’re in to help your children—and yourself.
