Helping Adult Children Financially Without Hurting Your Own Retirement

One of the first things you learn when you become a lifeguard is how to help a drowning person without putting yourself in danger. You see, when someone is struggling in the water, they will grab onto anything they can reach and try to climb up toward the air; that includes another swimmer who is trying to rescue them. So, lifeguards learn techniques that enable them to get the endangered person to safety without becoming victims themselves.

A similar situation can develop with adult children who aren’t doing well financially. As parents, our natural instinct is to “jump in” and try to help them. But if we’re not careful, we can put our own financial security in jeopardy.

How much financial help is too much when it comes to adult children?

As we’ve mentioned in a previous article, we don’t do owe our adult children any favors if we compromise our ability to support ourselves in the later years. In fact, when we fail to prioritize our own retirement security, we put our kids in the position of having to support us, typically creating tensions among adult siblings, not to mention the financial stress and the logistical dilemmas. Still, one of the most common problems faced by older persons is the tension they feel between securing their own financial wellbeing during retirement and providing assistance to an adult child who is struggling. If you think these words are aimed at you, you’re not alone; recent estimates indicate that around half of US parents say they are providing regular financial assistance to a child age 18 or older, to the tune of an average $1,474 per month. For some, this includes kids in their 40s.

What is the difference between helping and enabling adult children financially?

Now, let’s be clear: we’re not talking about offering temporary respite due to an accident, illness, or other mishap beyond the child’s control. It is entirely appropriate for parents to aid their children in emergencies or difficult situations like these. And there may be nothing wrong with small helps we can provide to our children as they enter and adjust to adulthood: for example, keeping them on your cell phone plan for a limited period of time, or helping to pay off a vehicle. Even assistance with making the down payment on a first home can be okay, as long as it doesn’t compromise your own financial security or come with expectations of ongoing help with the mortgage or future home purchases.

In other words, “temporary” is the key term here; it’s important to establish clear guidelines about the nature and amount of the aid and especially its duration. These forms of help should be both specific and clearly limited in scope. Above all, they should not become an ongoing part of the adult child’s lifestyle planning. In most cases, it does not serve the long-term wellbeing of an adult child to have open-ended assumptions about being subsidized by “The Bank of Mom and Dad.” In fact, when we enable them in this way, we are effectively crippling them: reducing their ability to develop into fully functional, responsible, and independent persons.

How do I set financial boundaries with adult children?

With all that in mind, here are some useful points for parents who want to help their kids stand on their own two feet and also avoid financial dependency in retirement.

1. Communicate expectations. Children who have temporarily moved back home must understand that keeping up a home requires financial input from those who are benefiting and who have the capability to assist. For the kids’ own good, parents can’t allow them to freeload; that sets them up for even more failure, later in life. So, the parents may need to require the kids to help out with groceries, utilities, and rent, even if they have to take a low-wage job to do so. As mentioned above, when assisting due to a temporary setback, communicate clearly the time limits involved in order to avoid unwarranted or unhelpful assumptions about how long children can remain “on the payroll.”

2. Expect accountability. If the kids are living in Mom’s house, they should be accountable for their hours, for getting to work on schedule, for paying or contributing to the bills on time, and for doing all the other things that “regular adults” are required to do when living on their own. Parents may also want to work with the children to set up a mutually agreed schedule by which the kids will take on more of their own expenses, with the goal of “moving out and moving on” by a certain future date.

3. No handouts. The whole point is to get the kids to start paying more of their own way. If the parents are constantly providing financial backup, they de-incentivize this important learning process. To the extent possible, the kids should be treated like renters and co-payers who are expected to hold up their end of the financial bargain.

4. Get an ally. A professional financial advisor can be a tremendous resource for working with financially dependent adult children. As an objective third party, they can help the child understand your limitations and may even be able to provide the “coaching” needed to help the child achieve greater financial literacy and responsibility.

What about co-signing a loan?

Make no mistake: when you co-sign a loan for a child or anyone else, you are assuming 100% of the responsibility for timely repayment. If your child misses a payment or is habitually late, your credit rating takes a hit. The amount of the indebtedness may also limit your ability to obtain other credit for purposes of your own.

On the other hand, co-signing for a child may give them the leverage they need to get back on their feet. But certain requirements should be met:

• The child has a reliable income stream that will enable them to make timely payments;
• You can comfortably afford the payments yourself if your child proves unreliable or unable;
• Your child has a clear repayment plan in place that you understand and have agreed to.

In other words, think carefully before obligating yourself to debt on behalf of your child. As long as the risks and requirements are clear to both of you, going forward may be permissible.

At Aspen Wealth Management, we understand the desire to help our children—and grandchildren, for that matter. We work with clients to develop targeted gifting strategies and other methods for supporting the financial welfare of the next generations. Let us know how we can help you.

How can I help my adult child learn better money management?