How to Protect Your Own Financial Health When Helping Adult Children

Before a commercial flight leaves the ground, flight attendants instruct passengers to "Put on your own oxygen mask first before attempting to help others around you." The rationale is that if you become impaired, you won't be able to help anyone else.

The same reasoning can be applied to helping adult children financially.

Not All Baby Boomers Can

The Baby Boomer generation currently holds around $78 trillion in assets. However, this wealth is distributed unevenly. For the total U.S. population, the Federal Reserve reports in Q1 2023 that the top 50% of households have 94% of total assets compared to only 6% for the bottom half.

This inequality holds for the Boomers as well. In fact, 42% of Boomers do not have any retirement savings. Among those who do, the median amount was $134,000, a nest egg many experts predict won't last long enough in retirement.

This means many Boomers will depend on Social Security for the long haul. Yet, since the average monthly Social Security check is only about $1,800, some retired Boomers will have difficulty keeping up with their living expenses.

Overall, for Boomers on the lower half of the scale, helping adult children financially might not be feasible.

Use Caution When Helping

On the other hand, many Boomer parents are helping their adult children financially. A survey by Savings.com showed that 45% are supporting at least one of their grown-up kids this way. Of these, the average monthly amount is over $1,400. Parents with ten or fewer years left until retirement were the most generous. On average, they paid $2,100 monthly while putting only $643 into their own retirement accounts.

The largest expense categories were housing (rent/mortgage), cell phones, and groceries. Some parents in the survey (21%) said they were helping with student loan payments, with the average monthly amount being around $245.

Yet with this giving comes risk to one's financial standing. A 2023 Credit Karma survey found that 81% of parents who financially supported at least one adult child reported it negatively affecting their finances. Examples were:

Also, healthcare and long-term care costs can be significant in later years. Baby Boomers currently range in age from 60 to 77, and according to LongTermCare.gov, of those reaching age 65 today, about 70% will require some long-term care before they die. Of these, 20% will need it for longer than five years. Therefore, overly generous financial outlays to adult children today could limit options for affording essential care costs in the future.

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Logical Steps

Here are ten ideas to think about when considering financial support for an adult child:

1. It's important to carefully determine how much you can afford. Be especially cautious about protecting your retirement savings. It's one thing to free up money to help your kid by trimming your expenses. In contrast, if you draw from your retirement funds, you put your own future at risk.
   
   
2. Think through how you prefer to manage the arrangement. Consider your needs along with your child's. Decisions around helping your child are overloaded with emotion. We all sacrifice for our children and want to help them in times of genuine need. At the same time, you want to nurture their growing self-sufficiency.
   
   
3. One idea is to structure the arrangement as a loan rather than a gift, placing responsibility on their shoulders rather than creating a sense of entitlement. In the end, you can forgive the loan if necessary. However, a gift, once given, can rarely be gracefully reversed.
   
   
4. Meet face-to-face with your adult child to discuss the situation beforehand. Long-distance communications leave more room for misunderstandings.
   
   
5. Most of the time, these arrangements are temporary. Both parties should mutually agree on the conditions under which the arrangement ends.
   
   
6. Think through the details of the arrangement. If, for example, you will be babysitting part-time for grandkids, think about the various scenarios and state what you are willing to do. Also, both parties should reserve the right to request changes once the arrangement is underway.
   
   
7. If help takes the form of an adult child moving in with you to save money, both parties must be clear about the ground rules. For example, what responsibilities does the "tenant" have around the house? Remember that your new housemate may have gotten used to much freedom after leaving home initially. Be aware that this "kid" isn't twelve anymore, and you'll probably need to monitor your behavior to avoid being overly paternalistic. On the other hand, your kid needs to realize they are no longer a "kid" and must act like a responsible adult.
   
   
8. Once you agree on the details, put everything in a document both parties sign. It will be helpful to have this for future reference rather than relying on memory.
   
   
9. Refer your adult child to resources for budgeting and financial planning. Many books, online resources, and classes are available for young people to learn about being financially independent.
   
   
10. Providing referrals to financial coaches, financial planners, and accountants can bring knowledgeable and objective professionals* into the mix. As neutral third parties, they don't have the emotional baggage that builds up in a parent-child relationship. It can be ironic that your adult kid readily heeds advice from such a stranger, even though you've offered the same wisdom many times in the past.

Post-Boomer generations need help equaling the widespread affluence of the post-WWII cohort. Many Boomers, therefore, are inclined to devote some of their wealth to helping their adult children. In doing so, they need to be savvy about how much help to give and how to deliver it so they don't overtax their resources and prevent a sense of entitlement among their beneficiaries.