At a recent Extravaganza class in Philadelphia, we had a discussion on “Helicopter Parents” and how more and more parents are taking on the financial debt of their adult children. While it is admirable that parents want to lend a helping hand to recent college grads, it is quite another thing to take on debt at the expense of retirement savings.
I tell my clients to start planning early – before their kids are even in high school, if possible. Parents know their children better than anyone and may already have a sense of whether they will be fiercely independent or back living in their basement until they are 30 (I have one of each). Ask. You may be surprised at the parent’s candor. You may also get a sense from your discussions that the parents are clueless or quintessential “helicopter parents” and you will have to give them a financial reality check. Prepare now for the discussion, if you haven’t already done so.
The article below appears in today’s (10/9/15) New York Times and addresses the trend. I hope you find it of interest and it helps you facilitate a discussion with clients (and maybe even your kids).
Thinking Hard About Extending a Financial Hand to Adult Children
Cutting the financial cord with adult children can be hard to do.
Just ask Virginia Illiano, a substitute teacher who lives in Brooklyn. After her daughter graduated from an expensive private college, Ms. Illiano thought her days of paying big bills for her daughter were over.
She was wrong. Her daughter, who is in her 20s, was not able to find a good-paying job and ended up moving in with her mother. That was just the beginning. Ms. Illiano co-signed for a leased car, repaid some of her daughter’s credit card debt and even paid for her nails, vacations and some clothes.
“My teacher benefits are awesome, but she won’t have any of that,” said Ms. Illiano, 55, who is divorced. And that’s just fine with Ms. Illiano.
“I told my daughter to go for her dream,” she said, explaining that she wanted her “to have her financial legs.”
Ms. Illiano’s financial leg up for her daughter, however, has a downside. She is dipping into her own retirement funds, which means she is now looking at a couple of difficult choices: working longer or selling her home, which is already being used as collateral for her daughter’s student loan.
More older parents are facing challenges like Ms. Illiano’s. They are helping out their adult children by dishing out loans or cash gifts, or paying bills. But this largess sometimes blows a big hole in their finances, even jeopardizing their retirement. As a result, some older adults are going back to work, reducing their own living expenses or even declaring bankruptcy.
While rigorous data is difficult to obtain, several reports suggest that the problems associated with supporting adult children are growing. At the same time, many baby boomers are far short of holding enough in their retirement accounts to support themselves into old age.
“Some adult children aren’t making enough money,” said Netiva Heard, a certified debt counselor at MNH Credit Solutions in Chicago. “So parents are taking over certain bills like credit cards, cellphones and rent.”
Parents, of course, want the best for their children from the moment they are born and are used to doing everything they can to help them. Continuing that support into adulthood has spread, experts say, largely because the economy of the last decade has fallen short in generating good job opportunities for their millennial children.
“But the last thing you want is for your kids to end up taking care of you financially,” Ms. Heard said. “And, anyway, kids can learn from their own money struggles.”
Baby boomers face increasing retirement challenges of their own as traditional defined benefit pensions have been widely replaced by riskier 401(k) plans and the like, which require disciplined savings. Many have not done the comprehensive financial planning needed to factor in the greater chance that they will live longer, or accumulated enough in savings and investments to cover future health expenses.
“So they’re not looking at the long-term effects of shelling out $5,000 or so per year to adult kids,” said Jamie Hopkins, associate professor of taxation at the American College of Financial Services in Bryn Mawr, Pa. “That money could be funding an I.R.A. contribution.”
There are clear warning signs, experts said, that parents may be giving their adult children too much money. These include taking loans from 401(k) accounts, failing to make full retirement account contributions or draining savings.
Take Jacquelyn McClellan, 74, who lives in Orange City, Fla. In what admittedly is an extreme case, Ms. McClellan, a retired program analyst for the federal government, began paying for various expenses for her grandchildren after her son said he could not afford them. She paid for dancing school, parochial school, trips to Disneyland, all with the help of money from her pension.
These payments ended up tipping Ms. McClellan into bankruptcy in 2011. Since then, Ms. McClellan has sharply dialed back her own lifestyle. She can’t go on vacation cruises and has only minimal savings.
Still, Ms. McClellan felt a sense of duty to help out her grandchildren. “I didn’t want them to have a bad life,” she said, adding that they are now flourishing.
Giving some financial help can be a much-needed balm for family members. The problem is, many parents approaching or already in retirement do not know where they stand financially and how much they can afford to give without undermining their own security.
Giving gifts of money to chronically needy adult children can become expensive very quickly.
To solve a money squeeze, avoid giving away inheritances early, said Eric J. Schaefer, a certified financial planner at Evermay Wealth Management in Arlington, Va. Adult children often only end up coming back for more money, he explained.
Supporting more extravagant expenses like a fancy car or country club memberships should be cut off altogether, Mr. Schaefer recommended.
One-time loans, or gifts, that are used to pay for unexpected emergencies like medical expenses require little thought for parents who can afford them.
But going back to the money trough time and time again is dangerous. “Look at kids and ask, ‘What is the money for?’” said Robert J. Semrad in Chicago, the senior partner at DebtStoppers, a bankruptcy law firm. “Is this a solution to the problem or just a Band-Aid? Many times money given as a Band-Aid merely delays the inevitable.”
Avoid co-signing loans for cars or homes, Mr. Semrad said, since a parent’s own credit can be jeopardized. “Banks can go after co-signers,” he said. “And having assets makes you more susceptible.”
Properly drafted loans by parents to their children can teach the children valuable financial lessons, though. The keys, experts said, are to give the loans set terms and to establish a regular repayment schedule.
Peter Lazaroff, a financial adviser at Plancorp in Missouri, recommends loans that include interest rates. The loan then works just like a bond, he added, and the parent gets back principal and interest. The child should also sign a contract, which can be drafted by a lawyer. A loan that is not paid back can be deducted from an inheritance.
Kathleen Gurney, who runs the Financial Psychology Corporation in Florida, encouraged parents to structure a loan as if a son or daughter were a business partner. The contract should include loan terms, length and consequences for nonpayment.
“Loaning money works well,” she said, “if the process is objective and well planned.”
Ms. Gurney has seen many cases in which older parents helped out their adult children, only to end up in dire financial straits themselves. One couple she counseled had to return to work part time in a restaurant because they had decided to support their divorced son’s wife and children.
“These financial decisions can affect your health and marriage,” she said. “And some people even slip into depression because they must continue to work.”
Experts also caution against giving a loan to an adult child who clearly cannot repay it. Family loans, they point out, are common, but being paid back is less so.
Instead of cash, parents can offer their children networking help in looking for a job and provide other forms of support. But when gifts or loans are involved, the most important thing is to be honest with yourself — and your children.
“Tough love,” said Mr. Hopkins at the American College, “requires parents to plan what they give their children. So you must have a process in place.”
Source: The New York Times (Oct. 9, 2015)
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John