Many parents, almost two-thirds by some estimates, provide some sort of financial support for their adult children; but how far should those housing, cash, or debt lifelines go and when, and perhaps more importantly … how should that financial support end?
One financial case to consider…
After two and a half years of working toward a business finance degree that he was not excited about, Spencer Shwetz decided to drop out of college in August 2014 despite his 3.4 grade point average. He had been living at home and commuting to college, and he continued living at home after leaving school.
He was in good company: 32.1 percent of 18- to 34-year-olds are living with their parents, according to a Pew Research Center analysis of 2014 U.S. census data.1 That is the highest percentage since 1940.
By October, Spencer’s parents had decided it was time for him to leave home.
“It was clear he wanted to be out on his own and I helped him make that transition quickly,” said Steve Shwetz, managing broker at Mesa Property Management in Southern California. “Our relationship was strained for the first six months post-move out, but it is now better than when he was living at home.”
Spencer has a slightly different take. “I would say moving out shattered the relationship for the next year,” he said, because it was not his choice to move out.
Steve and his wife decided to give their son finite financial assistance as he transitioned to an independent life. “In exchange for leaving, we funded him monthly what we would have continued to pay for the local state university he was attending,” he said.
To some parents, it might sound like the Shwetzes were rewarding bad behavior. But Steve said he was OK with the arrangement because Spencer had a plan.
“My son decided his passion was to pursue a career behind the camera in Hollywood,” Steve said. “That industry is full of kids with film degrees, lots of student debt, and no job. In the film industry, it’s more about networking and being willing to work hard, sometimes for free, to get started.”
Spencer said the money lasted him less than a year and it went toward rent, utilities, and car insurance. He was not required to be accountable to his parents for how he spent the money, but they tracked what they had given him on a shared spreadsheet and “as soon as the spreadsheet showed the money was up, it was up,” he said.
Since dropping out, Spencer has worked on three feature films and numerous commercials and student films, among other endeavors. He is financially independent and debt free at age 22.
“I had saved all my life so I had money, but getting a chunk of my tuition every month gave me the comfort to go out and give away my time to learn instead of stressing and falling back on a regular 9-to-5,” Spencer said.
Many parents provide financial support to adult children
Circumstances like Spencer Shwetz’s are surprisingly common. A Pew Research Center study of 1,692 American adults conducted at the end of 2014 found that 61 percent of U.S. parents had helped an adult child financially in the last year.2 About 58 percent of financial assistance was for special circumstances, while 15 percent was for recurring educational expenses, and 19 percent was for other recurring expenses. Indirect financial assistance is also common: many parents help with errands, housework, home repairs, and child care. Most parents surveyed (89 percent) said helping an adult child is rewarding, but 30 percent found it stressful.
TD Ameritrade’s 2015 financial support survey of 1,000 American adults found that a much smaller percentage of parents — 10 percent — said they were supporting an adult child financially, to the tune of $10,000 on average over the last 12 months.
How to financially help, not harm
Financial advisor Paul Ruedi, CEO of Ruedi Wealth Management in Champaign, Illinois, said that in his 32 years of experience with his clients, arrangements where parents help their adult children financially work best when the parents insist that the child meet with him.
“I am not against helping, but I think parents need someone between them and the children, someone to help establish realistic rules,” Ruedi said. “I try to get them to write an agreement with specific terms. For example, if it is a loan, create a loan document that gets signed. If it is ongoing support, we write down how much to expect and for how long. Then all parties sign. That way, if a child suddenly ‘forgets’ and starts to whine, the parents can drag out the agreement.”
Ruedi said he also tries to spot kids that do not live in reality and are not willing to live up to any responsibility and suggests that parents not give money in those cases. For kids that can be helped, he asks them for their plan of attack to get back on their own two feet.
Ruedi and Steve Shwetz suggested specific ways to help adult children that do not provide excessive assistance or strain parents’ budgets.
Shwetz suggested keeping an adult child on the parents’ health insurance plan for as long as possible or until the child can get health insurance from their employer since the cost is minimal. He said he did this for Spencer. Another easy way to help is to keep the child on the family mobile phone plan. Spencer is still on his family’s plan, but contributes $30 a month to cover his share, which is substantially less than he would pay on his own.
He and his wife also offered to match dollar for dollar any IRA contributions their three sons made during their first year of working and paid for half of their first cars. They plan to match their sons’ down payments dollar for dollar too when the time comes to buy a house.
“Today more than ever kids need help starting out, but that help should be measured, finite, and clearly defined,” Shwetz said.
Ruedi also believes in helping children with a first home purchase and said this is the most common type of help he sees his clients offering their children — either the gift of a down payment or being the bank by creating a formal loan from parent to child. If a parent has a fairly large fixed-income investment portfolio, they can usually create a mortgage where the interest rate can be favorable to the children yet compete with their current yield of the parents’ portfolio.
But he added that the families that can make a business-like loan arrangement with a child are the exception. Most of the time, when his clients mention lending children money, he tells them, “Let’s not call it a loan, let’s just consider it a gift. We can structure the loan, but emotionally, be prepared for it to never be repaid.”
Sacrifice: Parents saving, kids budget
“You can’t help most adult children just a little,” Ruedi said. “Make sure that whatever you are thinking about doing, you can continue forever because that’s generally how it works.” He said that in his experience, many children begin to expect the help and do not realize that it is intended to be temporary support, and he has seen adult children give their parents a hard time at the first notion the support must come to an end. That is why he recommends creating a written agreement up front.
More than a third of respondents to TD Ameritrade’s survey said they would delay retirement to support their adult children. (Calculator: What will my income be in retirement?)
Gary Silverman, founder of Personal Money Planning, a registered investment advisor in Wichita Falls, Texas, said parents should ask themselves, “How much can you afford to give? What will you have to give up in order to provide this money to them? Will you have to delay your retirement? Forget about the travel you were planning later in life? Downsize your home? Live on Social Security as your only means of support in your old age? Run the numbers — what are you giving up?”
Further, parents who provide financial support might be harming their adult children’s chances of success if the support prevents them from developing the skills they need to be self-sufficient.
“If your child had a one-time, out-of-their-control need and you have the resources to help them through this hard time without bankrupting your own goals, then I see no problem in helping them out,” Silverman said. But his experience has been that kids cannot bring themselves to give up their wants to be able to afford their needs and parents will rob from their own futures to help their kids continue down this path.
While TD Ameritrade’s survey found that more than half of parents who provided financial support said they talked to their adult children about how to manage their money and how to reduce the amount of support they needed, 84 percent of parents who support their adult children said their children’s saving and investing skills ranked lower than an 8 on an 8 out of 10 scale. (Related: Helping your teenager establish good credit)
Yet, 69 percent of parents said they would continue helping their adult children until they found a job that paid well enough that they no longer needed help, and 9 percent said they had no plans to discontinue support.
Silverman also said that an expense that might at first seem to be beyond a child’s control might not really be so when you dig deeper.
“If your child was saddled by health-care costs that they didn’t have insurance to cover, that was a controllable problem — if they had the insurance,” Silverman said. “Maybe they couldn’t afford it, but if they either opted out of the insurance or went with the cheapest policy so that they could live in a nicer house, go on vacations, or [pay for] other expenses less important than their health, I’m thinking this was controllable.”
Kids who benefit from their parents’ generosity and do become self-sufficient may not realize that there will be a bill to pay later, when they have to support their parents because the help they provided means the parents cannot afford their own retirement.
The financial bottom line
Parents who are going to help their adult children financially need to know how their kids are using the money and how much they’re shelling out over the course of a month, a year, or several years to make sure their kids are being responsible and the parents are not harming their own finances.
It is one thing to help a child who is doing his or her best and genuinely struggling; it is another to fuel a sense of entitlement.
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1 Richard Fry, “For First Time in Modern Era, Living With Parents Edges Out Other Living Arrangements for 18- to 34-Year-Olds,” Pew Research Center, May 24, 2016.
2 Pew Research Center, “Family Support in Graying Societies,” May 21, 2015.