Episode 238 – A surprisingly large number of parents are jeopardizing their financial futures to support their adult children. Is it worth the risk?

Hello this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode: Parenting doesn’t end when your kids become adults.

According to a new survey by Bankrate, an independent publisher and financial comparison service based in South Carolina, over two-thirds of parents of adult children have made a financial sacrifice to help out their kids. The results are concerning: a significant number of respondents say they are sacrificing retirement savings (43 percent), emergency savings (51 percent), paying down their own debt (49 percent) or reaching a financial milestone (55 percent).[1]

The unanswered question is this: How much help is too much? In other words, does helping adult children jeopardize their parents’ long term financial security? Every situation is different, and some hardships can’t be avoided. Some families are dealing with children who are physically disabled, while others are dealing with adult children who are financially irresponsible or dependent on drugs or alcohol. Others simply have too much student loan debt.

The situation is bad enough for most parents. According to a recent survey, only about 40 percent of Americans say they have enough money set aside to cover an unexpected $1,000 emergency expense. In fact, 25 percent say they would pay such an expense by using a credit card.[2]

Inflation has become an important complication in all this. Young adults are facing a higher cost of living, and wages that may not be keeping up with inflation. It’s likely that Mom and Dad will want to help, if at all possible, and the need is probably greater today than it was just two years ago.

Setting limits up front is certainly a good idea, both in the amount and duration of any assistance. The tough part is knowing how far they should go. Perhaps the best question to ask is: Will providing this financial support to my child effect my standard of living at some future date? If the answer is yes, then it’s probably too much. As we are reminded every time we ride an airplane, it’s a good idea to put on your own oxygen mask before trying to help others.

As a parent, you need to do a certain amount of homework. No matter how much you trust your kids, it’s usually a good idea to verify that the need is real. Sadly, there are some adult children out there who are all too willing to take advantage of their loving parents. And since the pandemic, there has been an increased tendency for adult children to stay home longer, get married at a later age, and rely more on their parents for the basics.

You need to be careful not to create a dependent adult child. To combat this, some experts have suggested that it is best to charge your adult children rent, and to not pay any allowance without some strings attached.

And exactly how do you provide that help? It doesn’t have to be a gift. It could be a loan, or maybe even an advance against their inheritance. If it’s a loan, it’s best to make sure that it’s fully documented. Otherwise, there’s a risk that your loan may eventually be deemed a gift.

Your Security Mutual Life insurance advisor can help you sort through your options and help get the process started.  Your advisor will assemble your team and coordinate with your attorney and tax professional to review your situation and to determine the plan and strategies that are appropriate for you and your family.

[1] Gillespie, Lane. “Survey: 68% have made a financial sacrifice to help their adult children with money.”  https://www.bankrate.com/personal-finance/financial-independence-survey/ (accessed May 25, 2023)

[2] Gillespie, Lane. “Bankrate’s 2023 annual emergency savings report.” https://www.bankrate.com/banking/savings/emergency-savings-report/#less-than-half  (accessed May 26, 2023)

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