Supporting adult children: it is a financial obligation that many parents cannot avoid. What they tend to overlook, however, is how it affects their nest egg and long-term retirement plans.
Nearly 75% of people support their adult children with living expenses, according to a recent poll by creditcards.com. The amount varies, with a University of Michigan study showing that about 40% of recent college graduates in their 20s get approximately $3,000 a year from their parents. That translates into about $250 per month.
Not surprisingly, the amount given also varies based on their children’s college major. Those in art and design fields tend to need more support than those in health. Perhaps what is more surprising, though, is that those without any degree tend to need less financial help from their parents—even compared with young adults in traditionally high-paying fields such as STEM, as noted in a New York Times report.
Young adults depend on their parents’ help for basic living expenses including rent, transportation, cell phone, and utility bills. Sometimes, though, the support is given in a lump sum to help with a down payment on a home, to start a new business, or for graduate school.
Supporting adult children long term can devastate carefully-laid retirement plans. Not only do parents sacrifice immediate monthly income; more importantly, they sacrifice precious investment money that grows exponentially over time. For example, with compounding interest, $2,000 invested annually will total nearly $35,000 in 15 years, per the compounding calculator at moneychimp.com. That’s a significant loss to a nest egg that will be needed when income typically ceases and health expenses typically increase.
What can parents do?
First, parents should reassess their adult child’s financial situation. How long does he need support for? What is she spending her income on? Can he increase his working hours to earn more? Are you enabling dependency when your adult child may be capable of supporting himself? Answers to these questions requires difficult conversations. But they are necessary to plan more effectively and eliminate unknowns. By setting timelines and deadlines to stop or reduce financial support, parents can create realistic financial plans and retirement goals.
Setting conditions for continuing financial support may also work for some families. Adult children may be compelled to change their financial situation with a little pressure and clear expectations. Parents and adult children often benefit from such tough love.
At Silverman Financial, we understand that each family has unique circumstances, needs and financial obligations. We support our clients by creating individualized retirement plans that satisfy such needs without derailing a comfortable and secure retirement.