Dec. 27, 2017
If you’re not careful, lending your adult children a financial hand can have significant consequences later on. It could cost you as much as a quarter of a million dollars out of your retirement nest egg, new research has found.
Some 80% of parents of children 18 and older are covering, or have covered, at least a portion of their adult child’s expenses, according to a recent survey from NerdWallet. That includes helping pay for groceries (56%), health insurance (40%), rent or housing (21%), cell phone bills (39%) and car insurance (34%).
However, if parents took the money they were spending on their children and put it toward retirement, they’d have about $227,000 more to tide them over, the report says.
“We don’t want to suggest that people don’t help their kids, but we found that some of these expenses might seem small on a monthly basis, but they really add up over time,” says Andrea Coombes, NerdWallet’s investing and retirement specialist. “Parents may not be realizing the degree to which this affects their retirement.”
The key, Coombes says, is that parents must make sure they’re on track for retirement before they send money their kids’ way. Run your numbers through a retirement calculator with your advisor to determine that you’re saving enough over time.
If you aren’t, you may need to cut back on the Bank of Mom and Dad so you don’t end up in an uncomfortable situation later. And, newsflash: Relying on your kids as a source of retirement income isn’t a solid plan, although nearly a quarter of parents saving for retirement expect their kids to provide financial support for them after they retire.
“That’s a very risky belief,” Coombes says. “We have no idea how our children will fare financially. Hopefully they’ll do really well, but you don’t know. And it’s unfair to the child.”
One approach is to ask your adult children to pitch in. “Parents really need to sit down with their children and talk with them about some ways the kid could help out,” Coombes says. Maybe the parent pays the car insurance bill, for instance, but the kid pays a percentage of the cost that gets higher over time.
Additionally, don’t bankroll your kids’ extracurriculars. “One thing we found was that 20% of these parents are paying for entertainment,” Coombes says. “Maybe it’s time to dial it back on entertainment and put that money toward your retirement.”
Another 32% of parents are paying for their adult kids’ clothing. “Some of these kids may be in college and may not have full-time jobs, but they can have a part-time job and pay for their own clothing,” Coombes says. “These are the questions we want parents to think about, rather than doing this blindly.”
Get your own wake up call by plugging your numbers into a calculator to see how that $50-a-month check could add up by retirement age.
And remember that planning for your own retirement—and involving your children in the process—is a great way to model responsible financial behavior. “You talk about your own retirement as a parent, and that’s encouraging a child to think about his or her own retirement,” Coombes says.
In the end, it’s not about not helping your kids. You just have to be smart about it. “What we are saying is if parents aren’t saving enough for retirement, they don’t want to be paying for their kids to go to a concert or get a new car,” Coombes says. “They need to prioritize retirement. Otherwise their children may end up needing to support them later.”