Here is one of those somewhat touchy situations that I often get into the middle of with my financial planning clients. Since it comes up often, I thought it might make an interesting topic for this blog space.
The question is one of financial support for adult children. How much is too much? How long is too long? When to cut the strings? How to avoid family conflict? Clearly these are as much parenting questions as financial planning questions, but nonetheless clients have expressed their stories and concerns, and I thought it might be good to share what I have learned and observed over time.
Can You Afford to Help
The first and most obvious area of concern is affordability. Unless you want to risk becoming a burden to your child later in life, you don’t want to risk your retirement security by gifting money you need for your own security. And let's face it - if your child isn't financially indpendent, then relying on them for your future support is likely a really bad idea! So like the old saying, put your own mask on first! If someone has to endure a financial crisis, it is better that it be the child who has an entire lifetime to recover and rebuild, rather than the parent. Let's face it, there is no redo for a broken retirement plan!
Figuring out affordability seems easy – simply plugging a proposed gift amount into a financial plan we can gauge the effect on your lifetime cash flows and the chances of plan success. But it may not REALLY be this easy. If a parent wants to provide financial assistance to a child, my experience is that there is a pretty good chance that that financial support need will come up again. So the hard part is to be honest and think long term. “Oh, he / she just needs some help getting up on his / her feet” you may think. Well, maybe. But I’ve seen parents with kids in their 30s and 40s who are still trying to get on those feet and are still relying on parental support. This matters a lot because there is a HUGE difference in financial planning outcomes between, say, a one time gift of $20,000 (which may have little impact on your long term goals) and an ANNUAL gift of $20,000 every year for the next 15 years. So it is important to be honest with yourself and the child and discuss whether this is truly a one time need, or is the need going to be recurring. Then sit down with your financial planner and discuss the impacts of the proposed level of gifting on your financial security.
When to Help and When Not to Help
I don’t want to come across as a modern day Ebeneezer Scrooge. In fact, if parents can afford it, I am all in favor of helping their kids out especially as they reach certain financial or life milestones. Buying a first home. Getting started out of college. Wedding. Birth of a baby (and maybe some extended parental leave). After all, you can’t take it with you, right? And these milestones often represent significant financial hurdles for young people today. That said, based on my experience working with many parents, there are a few caveats for a generous parent to keep in mind.
First is to resist creating and supporting an unsustainable financial situation. An example would be helping a child buy a home when said child will not reasonably be able to afford the taxes, mortgage, and upkeep. Such a gift ends up being a curse to both gifter and giftee. The child is put in a situation which will cause ongoing stress and hardship, and the parent is likely to find themselves with the unenviable choice of watching child struggle financially, or continuously providing financial bailouts which he/she may not be able to afford.
Second would be to be careful about coming to the rescue every time your child suffers some financial hardship. It is often through financial hardship that a responsible adult finds the gumption to take a big career risk, or make crucial changes to lifestyle. Helping a child to financially squeak by may feel as if you are providing the protection a parent is supposed to provide, but it may also prevent the growth and change necesseary for the child to become a financially independent and successful adult. Furthermore, frequent financial hardship may be a sign that the child’s financial situation is unsustainable. In this case, as previously noted, your support will only provide temporary relief, delay necessary action, and may result in an ongoing drain on your finances.
Discuss Limits and Expectations
Be honest when discussing your own financial limitations. Kids, even as adults, tend to dramatically overestimate their parents financial capabilities. Probably because you spent most of their lives growing up providing for their every need, it leads them to think that the parental financial trough is bottomless. A little honest discussion surrounding the limits on your ability to help may be important.
Even if you can afford and wish to help, it is important to set limits or expectations you have. “We are happy to help you get started with the rent on your new apartment Suzie, but it is important to us moving forward that you can do this on your own. So we are willing to pay your first two months rent so you can build up a little emergency savings – but then it is up to you! If you need help creating a budget or learning to manage your money, let us know, we are always willing to help!” This way Suzie doesn’t consider your initial help with rent to be an open ended commitment of financial support whenever she comes up short at the end of the month!
Avoiding Family Conflicts
You gave so and so money, but not me, that’s not fair! The key here is often communication of intentions. “OK kids, Suzie is getting her first apartment, and can use a little help getting started. So we are going to help her buy some furniture and cover her security deposit and first months rent. We will do the same for each of you when that time comes, if you need it and we can afford it”. No one now should expect money, except in the event they are moving into their own first apartment. Same can be said for a wedding, etc. This could even work in the form of emergency support. “OK kids, your brother lost his job. He’s looking for a new one and I’m sure he’ll be back on his feet soon, but in the meantime we decided to help him out by making his rent payment and helping him buy some groceries. You know we love you all and would do the same if you were in the same situation!” Again, in this situation, there should be no need or expectation that all kids receive support just because Billy lost his job! The support is tied to the situation.
There is some danger however, that by helping a child out in one situation, the kids will see their first solution to every problem as "ask Mom and Dad for help". Again, communication is key. We can't afford to do this very often. We expect you to do what it takes to be financially independent adults.
It is much harder to avoid family conflicts when gifts are not tied to specific life events. Lets say you have 2 kids who are doing ok financially, and one who just can’t get life together. If the parents continue to bailout the slow starter, it may breed resentment from the others. One solution is to provide equal gifts, including to the kids who don’t need the money – but what that essentially does is to triple the cost of providing the assistance. That can get prohibitively expensive very quickly. This is another reason to resist providing ongoing financial support for an unsustainable financial situation.
Saying No is Hard to Do.
We are somehow wired as parents to want to help our kids. We have been their protectors for most of their lives. But sometimes we just have to tell them we love them, we will do whatever we can to help them figure out how to deal with a financial predicament - but we can't do it for them.
None of this is easy. As parents we are wired to protect our kids from pain and hardship. It was also hard watching them fall off a bike and get hurt – but we still knew that it was important that we let go of the bike (even if it might result in a scraped knee). Same way with these decisions. Eventually we need to insist that they fly on their own, even if it might involve the occasional crash landing. Parenting is never easy, even when they are all grown up.