There is nothing more important than your children. You don’t need anyone to tell you that. But when and how is it appropriate to help your children financially? This is a dilemma that many parents face.
You’re not alone
A recent study by the PEW Research Center (opens in a new tab) shows that half of parents still support their adult children financially. Clearly, we have just come out of the devastating pandemic in which many people lost their lives and their jobs. According to a Savings.com survey (opens in a new tab), 26% of parents say they have had to give children more during the pandemic, which is not a surprise. Our children have faced financial obstacles, such as a precarious job market until recently, high student debt and high housing costs.
I’m not going to focus on the parents who have stood up for their children in these difficult times. This is exactly what should have been done. I’m going to focus on the parents who are still dipping into their pockets and their own financial futures to support their adult children.
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This is not a new situation. Even pre-pandemic figures show similar results. A study by the PEW Research Center (opens in a new tab) 2018 revealed that before the pandemic, 45% of young adults aged 18-29 received financial support from their parents.
How much do parents pay?
The Savings.com survey found that, on average, parents give their adult children about $1,000 a month for expenses such as food, health and car insurance, rent, cell phones, schooling and travel.
Moreover, at the end of last year, more than half of young adults (opens in a new tab) still live with their parents. They are known as the boomerang generation. This is the highest return rate of young adults on record, including during the Great Depression.
You know how expensive it is to have other mouths to feed. your new reduced budget may not include additional fees for camping children. It is estimated that the average cost of housing (opens in a new tab) an adult child costs $459 per month, but I think that’s not much. This figure does not take into account the debt the parents can pay and all the sneaky emergency expenses – the dog gets sick, the tires need replacing, the computer breaks down. You know what I mean.
The real problem is that more than 60% (opens in a new tab) adult children do not pay rent to their parents. However, they help with household chores.
How does being a caregiver affect you?
It really affects parents. The calculation is simple. Parents who work and care for their adult children “…spend 23% more on their children’s expenses than they contribute to their own retirement or savings,” according to the Savings.com survey. On average, when they lend a hand, they contribute nearly $500 less to their own retirement.
Older people are working longer than before. To be fair, helping adult children is a part of that, but other reasons also apply, such as high inflation, living on fixed incomes, social security shortfalls, and the market downturn. scholarship. About half of older people depend on Social Security for the majority of their income, and these benefits are not enough to live on. Almost half (opens in a new tab) of seniors expect to work after retirement.
Parents helping with children’s student loan debt
More than 3.5 million parents (opens in a new tab) borrowed money to pay or help pay for their children’s education. The average starting balance is almost $29,000. Some parents have been repaying these loans for decades. It is difficult to anticipate payments, in many cases, as interest rates rise.
As we know, thanks to the new student loan forgiveness program (opens in a new tab), there will be up to $20,000 in relief for Pell Grant recipients earning less than $125,000 a year and up to $10,000 in relief for other federal borrowers under the same income cap. Currently, parents who have taken out PLUS student loans (opens in a new tab) for their children are eligible for up to $10,000 from the Biden administration’s loan forgiveness program. Some Democratic lawmakers are calling for the full $20,000 relief to be offered to parents whose children are Pell recipients.
College is seen as an investment in a child’s life. The hope is that when they graduate, they will reap the financial benefits and have enough income to pay off their debt. But when parents borrow to help their children, they seek no hope of higher income and will remain responsible if their children do not repay the loans.
Let’s look at the numbers
The average 60 year old (opens in a new tab) has about $172,000 in retirement savings. But the catch is that the cost of a comfortable retirement means having retirement savings of around $883,800. This will cause you to lose around $50,000 a year in income. This means that about half of retirees (opens in a new tab) risk of not having enough to live comfortably in retirement. Don’t be fooled by the numbers. There are many wealthy people who skew this number and make it look better. In addition, the pandemic has had a negative impact on retirees. According to a report by the New School’s Retirement Equity Lab (opens in a new tab)an estimated 3 million more people will fall into retirement poverty.
Most parents wouldn’t change their behavior to help their children – because they are parents, and that’s what parents do. The problem is that withdrawing money from their own retirement, delaying retirement, or continuing to work to help the children might not help in the long run.
What can you do to help your children?
Obviously you want to be there for your children – they are your children. But the financial realities of helping them can be devastating to your financial future. You may even set yourself up to be a financial burden to them in the future. Emptying your financial future may not be the only answer.
Here are some strategies to think about:
- The speech. Really have an honest discussion with your children explaining to them that you need to save for your retirement. Have this discussion using real numbers. State what you need for your future and what you need to save each month. Include Social Security estimate. Also talk about how you plan to reduce your expenses in retirement. You can downsize, take fewer vacations, live with a roommate, etc.
- Make it real. Make your contribution to repaying your children’s debt by establishing real loans with them with real repayment schedules. It’s hard to tell it’s not a gift, it’s a loan, but your kids need to understand what this will mean for your future.
- Offer it. Instead of taking out student loans or other loans for your children, consider giving annual gifts (opens in a new tab). If you can afford some or all of the amount, the IRS allows an individual gift of $16,000 for 2022 to any recipient without tax consequences. A larger donation can also avoid tax liability if accounted for in the living estate, which currently stands at $12.06 million for individuals.
- Cash it. There may be money you weren’t aware of. For example, when your children were young, you may have purchased cash value life insurance, a form of permanent life insurance. This type of policy is comprehensive or universal insurance that can build up cash over time as you pay your annual premiums. Maybe you bought it when your kids were young and wanted to make sure they had enough to live on in case they died. You can withdraw money from the policy, which could reduce the eventual death benefit of an insurance policy. If you cancel the whole policy, you will receive all the accumulated money.
I am never suggesting that you tell your needy child that you have other priorities. I suggest you have an open and honest discussion about how you can partner with them and make decisions together.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).