By FPA member David B. Lafferty, CFP®
Last Updated: October 10, 2011
While our country continues to go through tough economic times, more and more parents face a new threat to their retirement plans. It’s not just that the equity markets have been in turmoil or that parents may find themselves unemployed. The growing problem is that many adult children are returning home to live. According to a May 2011 survey by the National Endowment for Financial Education, nearly 60 percent of parents are providing, or have provided, financial support for their children when they are no longer in school.
While many parents are willing to help, the situation often comes with potential long-term side effects. Money that was set aside for mom and dad’s retirement is now helping to pay student loans, credit card debt and other expenses.
If you are considering helping your adult children, follow these recommendations before agreeing to let them move in. By setting some ground rules, you will likely avoid problems down the road.
Talk. Start with a serious discussion. This will help you decide whether you are able to or even have the desire to help them. You want to ensure that you and your children have the same expectations about the living arrangement. Are they trying to find a job? Are they living at home to save money for a house? Have they decided to go back to school? Are they just taking a break?
Review. Next, examine your own financial situation. If helping your children means that you won’t be saving for your own retirement or it will severely affect your ability to do so, you should reconsider your decision.
Plan. If you are financially able to help your children, your next step is to establish a plan. The more seriously you take the situation, the more likely your children will as well. Make sure your children know about their obligations regarding expenses and household chores. By setting and enforcing expectations, parents can help their children learn the skills needed to live independently.
Advise. If you agree to pay off your children’s credit card debt, make it very clear that it is a one-time occurrence. If your children think you will cover the bills when they can’t pay them, they will never learn the risks of credit. If you agree to loan your children money, consider charging them interest. This should encourage them to repay the loan in a timely manner.
Schedule. Setting a time limit is very important. Experts say that it is best for everyone to be on the same page in order to avoid the ill will that might arise from vastly different assumptions. You can always change the deadline later if it is appropriate.
Promise. Finally, keep your promises. If you and your children hold to your agreements, you should not encounter any problems. Resentment can arise when either party is not doing what was agreed upon. This can lead to financial problems for the parents, as well as a strain on the parent/child relationship.
FPA member David B. Lafferty, CFP®, is a principal and financial advisor with Wescott Financial Advisory Group LLC.