April 9, 2019

What do you do when your adult children can’t stand on their own financial feet?

I recently wrote a blog post about some of the challenges parents face when allocating money between spending on their children and saving for their own retirement. In this post, we’ll look at a specific scenario that we see fairly often as financial planners: clients with adult children who have not successfully launched their own financial lives. This picture can be painted with many different brushes — in some instances, parents may be helping children through a temporary bind as they fall on hard times, or in some cases, the adult child has been sheltered from real-world economic decisions and is facing a steep learning curve — but at the end of the day, the analysis is the same: how is the extra support for children impacting the parents’ ability to maintain their own lifestyle?

This analysis begins by examining the parents’ cash flow. In this exercise, we look at all of the income sources (social security, pensions, investment income, etc.), the potential expenses (excluding cash payments for the kids, initially), and make some general assumptions about inflation, investment return, savings rates, etc. This analysis presents us with a “baseline” look at the parent’s finances. We then run the same analysis, but we include the extra expenses for the children.

This side-by-side comparison is a valuable tool for parents to understand the impact supporting their grown children is having on their own long-term financial picture. For households in which the assets can support these extra cash outflows, the analysis may end there (with the parents occasionally putting a provision in their estate planning documents to even things out between offspring when assets are passed down at death). When the cash outflow has a significantly detrimental effect on household assets, however, this can be an “ah-ha” moment for parents – seeing the schedule of cash flows on paper is sometimes a rude awakening.

When the extra support to children takes away from parents’ ability to meet their future needs, there are two steps we usually take. The first is to bring the adult children in to the office for a meeting to explain the impact the support payments are having on their parents’ long-term financial security. These can be difficult conversations, but they help the children to see the bigger picture and understand the role they play. Having the conversation in the context of a financial planning session may be easier for the parents than trying to address it on their own. The second step is to develop a plan that everyone can agree to, whereby the support payments are reduced over time on a set schedule.

Having the financial advisor set a schedule provides clear direction to the kids and gives the parents an outside resource to act as the “bad guy” to lean on as they gently nudge their children into self-sufficiency. We build these schedules by further tweaking our financial modeling, so that parents can see the range of impacts that may come from reducing these payments over different time frames. A side benefit of this method is that, since the data is in our models, we can adjust things in real-time as the markets move and as our clients’ finances evolve.

It is difficult to navigate the balance between spending money on our children now versus saving it for our own needs later. For parents who are close to — or already in — retirement, understanding the impact of supporting their adult children is critical, as it can result in meaningful difficulties in the long run.  Facing the facts can help parents to make informed spending decisions, and perhaps help the children feel more motivated and determined to learn to stand on their own financial feet.