Don’t Let Your Adult Children Ruin Retirement

If your nest feels crowded and you can’t wait for it to be empty, it’s time to take control of your adult children and admit the damage they do to your retirement savings.

Remember when you couldn’t wait to move out of your parents’ house? Many members of the baby boomer generation are finding it difficult to get their grown children to leave the nest. Because of the recession, kids have been much more willing to move back home — and stay as long as they possibly can, to the detriment of their parents’ retirement savings.

Growing Number of Boomerang Kids

It might help to know that many retirees are in your shoes. Pew Social Trends reports that in 2012, 36 percent of adults between the ages of 18 and 31 lived with their parents. That’s a third of the millennial population.

In another study, TD Ameritrade analyzed the problems facing baby boomers as they deal with their “boomerang” offspring. In that study:

  • 76 percent of respondents said they felt obligated to support their adult children financially.
  • 57 percent said they would give in to those feelings of obligation and actually support the kids, even if it harmed their retirement.
  • 54 percent had actually taken their kids back into their homes.
  • 42 percent said doing so had hurt their retirement finances.

“Many retirees simply underestimate the amount of money that will need in retirement,” said Robert Stammers, Director of Investor Education at CFA Institute. “The big risk facing retirees is longevity risk or the risk of outliving one’s assets. Medical advancements and the fact that people are living up to live up to 30 years past retirement is significantly increasing the amount that people need to save. Supporting your adult children can significantly increase the risk of outliving your assets and it may force retirees to take more risks with their assets to prolong running out of money.”

The Cost of Housing Adult Children

Additionally, parents often fail to recognize the small expenses that add up to big money when they let adult children live at home free of charge. According to the Wall Street Journal, allowing an adult child to live in your home costs between $8,000 and $18,000 a year.

If your kids pay you rent to cover the cost, you’re in a better place than many. But for those letting their children stay at home rent free, the financial cost can be devastating.

If you’re in the unenviable position of having an adult child living in your home rent-free, it’s time to take back the nest. Obviously, you love your children and want the best for them. And let’s face it; these people might someday be making important decisions about your welfare when you no longer can.

However, whether you look at it emotionally or logically, it still makes sense to motivate your adult children to leave the nest on their own, rather than giving them the proverbial boot in the behind.

How to Prevent Your Kids From Impacting Your Retirement

If you have allowed your adult children (and possibly their children and spouses as well) to move back in, it’s important to sit down and a discuss the cost with your kids.

In fact, James A. Daniel, a NAPFA Registered Financial Advisor with The Advisory Firm, LLC, said it’s helpful to bring your children with you to meet with a financial planner, who should review expenses and counsel you on safe monthly withdrawal rates in retirement.

“If helping your adult children requires unexpected additional withdrawals, ask your planner to run the projection and share with your children,” Daniel said. “They should understand how supporting them could impact your lifestyle later in retirement.”

Once you’ve explained the cost to your kids, it’s time to lay down some ground rules:

1. Create a Plan

Mary Beth Storjohann, a CFP from San Diego, said it’s important to determine what your adult child hopes to accomplish by moving back home and what they need to do, specifically, to get back on their feet.

“Set goals for your children to accomplish and create a plan for getting them there,” Storjohann said. “Timing may not always be on your side in terms of finding a job and socking away money, but this way their can be a goal the family is working towards together.”

2. Make Them Pay

Agree on an amount your kids can afford while still working toward their financial goals. Ideally, your kids will pay for the full cost of housing them, but even half is better than nothing.

“Whatever you decide, you need to establish boundaries and expectations,” said Lesli M. W. Doares, a marriage counselor and coach. “They should be paying as much of their own way as possible, whether in dollars or in assistance around the house. Developing a realistic timeline and having frequent check-ins about progress will also be helpful for you both,” she added, even suggesting parents draw up a contract so everyone is clear about commitments to each other.

3. Set an End Date

“I am a believer in tough love,” said Jason Kolinsky, CFP of Kolinsky Wealth Management. “If the child is moving home for a period of time to get their feet underneath them, I think it’s important to have a move-out date set.”

By setting a date “in stone,” as Kolinsky puts it, your child might get the extra push needed to make changes and take action. Additionally, set a cap on the amount of resources your children will use.

“Don’t be afraid to set up internal credit or loan limits,” said Andy Smith, CFP, investment advisor and co-host of The Mutual Fund Show. “The Bank of Mom and Dad doesn’t and cannot offer open-ended lines of credit.”

4. Earn It Back

If helping your children reach their financial goals puts a strain on your retirement finances, you should require them to pay you back for your help. Once they reach their goals, create a monthly payment plan that will make up for the lost retirement money you put into your child’s future.

They might be your kids, but they’re still adults. That means you should help them as any parent would, but you don’t have to be a martyr. Your adult children should repay what they borrow from you.

Finally, know that you shouldn’t support your grown children financially if your own finances can’t handle it. As Elle Kaplan, CEO and founding partner of Lexion Capital Management advised, “Put on your own oxygen mask before assisting others. To help your family members, you must first be able to help yourself by taking care of your own baseline financial needs.”

Photo credit: Kevin Lawver

  • jake

    For a smart entrepreneur, someone could open a business that converts people’s houses with basements or spare rooms into a “boomerang” kid room.

  • Harry

    You should not pay for your children’s college, living or other costs unless your retirement nest egg is fully funded and secure. While it may not be an easy thing to do, your children have something you probably do not have: Time. They can probably take out loans while you may not have enough time to restore your retirement account if you loan/give them money. I recently found he site Retirement And Good Living which provides information on retirement planning, investing, finances, health, retirement locations, volunteering and much more. And the site provides several retirement and health calculators.

  • Nancy Z.

    In Chinese cultures, kids pay for their parents to retire! While I won’t place that burden on my own kids, I will certainly not let them leech off me when the time comes!

    Here is what I’m doing:

    1. I now put away the maximum amount in my 401K (5% for me) that my employer will pay into the plan as a match. It is free money and dumb not to do it. It was basically a raise I gave myself.

    2. After calculating my expenses, I found that driving was my biggest expense. I fixed that by buying a fuel efficient car thats durable (Honda Civic), finding an affordable insurance policy for it ($25/month from 4AutoInsuranceQuote, yay!), and using apps like Gasbudy/Waze to save money at the tank. I cut my transportation costs in half!

    3.I cut way back on eating out. I am having a year of putting away money hard, and food was a huge portion of my budget. I save about an extra $100 a week now, and eat healthier and better. Ditto for others if you spend a lot of money in bars.

    4. I need life insurance to protect my 2 daughters, but I ditched a $275 a month whole life policy for a term policy and now I only spend $25 a month. I save the difference to my Roth IRA. If you are unfamiliar with this and want to learn more watch shows or read articles from Suzey Orman or Dave Ramsey sometime. They are huge proponents.

    There really were no two ways about it. If I plan on having a full savings account (getting there) and a comfortable retirement (I will) I have to make good decisions with my money.