Some of your clients may be dealing with an expense they hadn’t anticipated when they first made their retirement plans: paying the expenses of their adult children. But more and more clients are, for a variety of reasons, providing financial support for their grown kids.
This trend may be threatening clients’ saving and retirement plans, says Jamie Golombek, managing director, tax and estate planning, wealth advisory services, with Canadian Imperial Bank of Commerce (CIBC) in Toronto. But there are several steps financial advisors and clients can take to minimize the damage to clients’ plans.
“Advisors have a huge role to play here,” Golombek says.
Financial plans should include the costs associated with the support of adult children, if your client family has decided such support is necessary and possible, he says. If not, a family discussion must take place. And you can help with that, too.
Golombek recommends you discuss financial independence with the parents of younger children as a way to begin instilling financial literacy at an early age and getting these kids on the road to financial independence.
Linda Cartier, president of Financial Decisions Inc. in Sudbury, Ont., tells her clients they are welcome to use her as a scapegoat when talking about this topic with adult children. And Cartier invites clients to conduct family meetings in her office in order to discuss the matter further.
Crystal Wong, senior regional manager with TD Wealth Financial Planning, also encourages her clients to bring adult children in for an appointment. “We’ll have a conversation around what financial success looks like,” Wong says.
She adds that when arrangements are made to help an adult child, such as the child moving back home, both parties should sign off on a plan with specific timelines, goals and expectations, such as the child contributing to housing costs, participating in chores and respecting house rules.
A recent CIBC survey found that more parents of young adult children are putting their retirement at risk by helping their children financially. Further, the CIBC poll found that 66% of survey participants who are helping their kids are feeling the negative impact of their generosity on their finances, with one in five delaying their own retirement as a result of their parental generosity.
“It’s been a pretty dramatic change,” Cartier says of the recent trend. Cartier, who has been an advisor for more than two decades, says there always have been parents who would cover some of their kids’ expenses from post-secondary education onward. But those parents were the outliers.
However, over the past several years, there has been a massive cultural shift driven by several factors, including a tough economy for those entering the workforce and the rise of so-called “helicopter parents,” who oversee and protect their children, even into adulthood. As a result, Canadian families increasingly are providing a substantial level of financial assistance to their grown-up offspring.
According to a 35-year household spending study conducted jointly by the University of Sydney (Australia) and the University of Pennsylvania, the most expensive time for parents when they’re raising kids no longer is the teenage years, as it was in the 1970s. Now, infants and college-aged children drain the most out of family finances.
The precise number of young adults between 20 and 29 years of age who get financial help from their parents is difficult to calculate. The most recent census, taken in 2011, indicates that 42% of these young adults lived at home. That number was up significantly from a decade earlier, when 32% of young adults lived with their parents.
The CIBC survey, meanwhile, found that room and board is the most popular way for parents to help adult kids, with 71% of these supportive parents providing housing and meals for free.
Some young adults living at home are first-time students, whose education costs could have been covered by RESPs started years ago by forward-thinking parents. A small proportion of these adult children may have disabilities or other factors preventing them from living outside the home. Some families also might be members of an ethnic group who believe children should remain in the family home until they get married. Other adult children being supported by their parents are in the midst of earning a second or third degree in hopes of being in a better position to crack the job market. As well, many of these young adults don’t live at home but still receive financial help from their parents.
The CIBC study found that 54% of parents are spending more than $250 per month on their adult kids and 23% say they spend $500 or more to help their children. Besides lodging, half of these supportive parents are shelling out cash for grocery and household bills, while 35% are covering their adult kids’ cellphone bills. However, perhaps more troubling is the fact that 11% of parents don’t know how much they spend in helping their kids each month.
That black hole – unmonitored discretionary spending – can tap out a family’s finances quickly, according to Laurie Campbell, CEO of Credit Canada, a non-profit credit-counselling agency in Toronto. That agency sees many cases of families getting deeper into debt by helping out their adult children and, in many cases, their grandchildren. While Campbell doesn’t propose parents turn their backs on adult children or grandchildren, there should be specific goals in place to help them gain financial independence, she says.
Finally, while it’s OK to recognize that overall economic conditions play a role in these young adults’ financial challenges, Gary Direnfeld, family social worker in Dundas, Ont., points out that some of these young people may have a sense of entitlement. It is up to the parents to determine whether that is the problem.
Direnfeld recommends that parents interested in making the transition to a more adult relationship with their kids avoid the “blame and shame” approach and stick to more neutral, data-driven conversations.
Direnfeld offers this advice for clients sacrificing their retirement plans in order to pay cellphone bills for their adult children: “If you want your son or daughter to have skin in the game and have financial incentives, don’t undermine [them] by paying their most important bill. They’ll find a way [to pay their bill].”
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