The trend toward parents helping to support their adult children has become the new normal in Canada. And financial advisors are witnessing the impact that such financial arrangements can have on all involved.
As young adults struggle financially, their baby-boomer parents are more than willing to offer a helping hand – assisting with expenses or permitting the children to move back into the family home. But as these parents provide help, they could be putting their own retirement plans at risk.
According to the 2011 census (the latest data available), 42% of young adults of ages 20 to 29 live in the home of a parent, up from 27% in 1981. Free room and board is the most popular way for parents to help their kids, according to a poll conducted by Canadian Imperial Bank of Commerce (CIBC) in 2015, which found that 71% of parents who helped their kids did so in this manner.
And these parents go beyond providing just lodgings, according to the CIBC poll, and help their kids with groceries, household bills and debt repayment, whether those adult children live at home or on their own.
Financial independence for many young Canadians has been delayed by several factors, including a tough job market, high housing costs and record levels of student debt. (This last category has arisen as some young Canadians seek out second and even third degrees in hopes of putting themselves in a better position to crack the job market.)
But, as Karin Mizgala, CEO and chief financial officer of Money Coaches Canada Inc. on Salt Spring Island in British Columbia, points out, a significant cultural shift is compounding the situation: so-called “helicopter parenting,” in which well-meaning parents hover over their kids to assist them, even into adulthood. As millennials have a tough time making ends meet, many parents feel obligated to help these children, even if the parents really can’t afford to.
And there are parents who are helping their grown children to a greater extent than the parents can afford. Laurie Campbell, CEO of Credit Canada Debt Solutions Inc. in Toronto, says that her agency sees a pattern repeat itself time and again: parents assume their kids will be self-sufficient by a certain age and plan around that assumption, only to have to revise those plans when the kids fail to get the foothold they need to leave the nest for good.
Because the parents are the family members with solid employment and income, Campbell says, they end up putting their own plans on hold in order to help their kids.
What can you do to help your clients who are in this predicament keep their retirement plans in order?
“[This conversation] is very tricky to have,” says Emily Rae, senior advisor with Assante Capital Management Ltd. in Halifax. “How do you say, ‘You can’t afford your adult children anymore?'”
Rae adds that it’s not really her job to tell her clients how to spend their money; she can only help them recognize the consequences of their decisions regarding their financial future.
But parents often display embarrassment and denial when discussing the degree to which they are helping their adult children.
The CIBC poll found that 11% of parents surveyed didn’t track how much money they were throwing toward their adult offspring – the survey participants just knew they were doing so. And every parent – including Rae, who has children of ages 19 and 20 – believes that their children will land a great job after graduation, she adds.
Mizgala points out that while young people face many challenges, today’s kids have higher expectations regarding their standard of living than previous generations had.
John Saikaley, financial planner with Desjardins Financial Security Investments Inc. in Ottawa, agrees that the needs vs wants paradigm is different for some in the millennial demographic. He says he knows of young adults who buy new luxury cars as status symbols while still living under their parents’ roofs.
Although parents may feel more responsible for helping their kids get a leg up than previous generations did, clients in this position need to understand the risks they’re taking, according to Mizgala. The adjustments needed are not just a matter of parents delaying retirement or forgoing some of the luxuries they thought they would have at this stage in their lives. The lost savings can affect more pressing obligations, such as health-care costs and boomer clients’ ability to care for their elderly parents.
Saikaley has a daughter in her early 20s who is living at home and working as a waitress. He doesn’t charge her rent, he says, but adds: “However, because I’m a financial advisor, I’m very strict about her saving money. I put pressure on her.”
Saikaley describes the trend of adult kids returning to their family home with an eye toward gaining some sort of financial advantage as a two-edged sword; he has seen situations in which the parents begin to rely on the child’s contribution to the monthly bills.
Saikaley, who is of Lebanese background and is Arabic-speaking, works within several ethnic communities. He notes that immigrant parents often are more prepared for the “full nest” syndrome than are their born-in-Canada counterparts because, in many cultures around the world, kids normally stay in the family home until marriage. These families usually are very clear about their expectations regarding household contributions – and that, he says, is crucial.
Here are some tips you might use with clients who are choosing to help their adult kids financially:
– DON’T JUDGE
Betty-Anne Howard, an advisor with Making Dreams a Reality, which operates under the IPC Investments Corp. banner, in Kingston, Ont., says that her role is more about inspiring and encouraging families, including the kids, than judging or telling them what to do.
There’s very often some conflict between what families value and what they can afford, she says. As an advisor, you need to understand that you can be part of the process that leads your clients to understand the limits of their ability to help their children, as well as the impact the adult kids are having on your clients’ financial future. Only then can your clients begin to take steps to rectify the situation.
Mizgala agrees that shame does little to help a client. “Get some clarity around the situation,” she says, “and move forward.”
– OFFER TO MEET WITH THE KIDS
Douglas Griffioen, director in the private client group of Toronto-based HollisWealth, a division of Scotia Capital Inc., in Waterloo, Ont., has met with a few of his clients’ young adult children just after they finished their post-secondary education. A brief conversation outlining their plans and expectations can be a big help in clarifying for the family what the next steps might be regarding financial help and expectations. Meetings such as these can relieve some of the pressure on both the parents and the children.
“Anytime you can bring a third party in, you remove emotions,” Griffioen says. “It seems to make [the situation] a lot easier for parents.”
Provide some financial literacy material to the parents, Howard suggests. Offering to talk, almost in a life coach or mentor capacity, to the adult children about career opportunities and goal- setting can be a big help in motivating them toward independence, she adds.
– LET THERE BE DEBT
Griffioen warns clients who are keen on helping their kids lose their debt burden that the parents may end up becoming “debt enablers.” Children must take responsibility for the debt they’ve accrued and take appropriate steps to manage it, he says. Griffioen believes a little debt is good as a learning tool because debt is the consequence of decisions – an important first step toward financial literacy.
Mizgala agrees that kids have to learn how to handle debt early on. She encourages clients who can afford to provide financial assistance to their kids to do so with the understanding that it will be paid back, as was the custom in Mizgala’s home when she was growing up.
“If we needed help in university, it was structured as a loan with repayment expectations,” she says, adding that her family had posted money owed by each of the four kids on a bulletin board since they were very young.
There was no shame in borrowing because nothing about money was a secret, she says.
– DISCOURAGE MOOCHING
Every family is unique, and some individuals – both parents and kids – are better equipped for handling money. Adult children need to have some “skin in the game” in order for them to learn to become responsible in handling household finances.
Saikaley says he has several clients who charge their children rent – but plan to give it back as a lump sum at some point in the future, usually when the child moves out, to help with housing costs.
Other clients do as he does and insist that the adult child, while living with the parents, invest a certain amount each month, in a TFSA, for example.
Mizgala says that if parents don’t want to charge rent – and that preference is becoming more common – the adult kids must contribute to household expenses, such as the cable or grocery bill.
“If [the children] are just freewheeling,” Mizgala says, “they are in for a rude awakening when they do ultimately move out.”
© 2017 Investment Executive. All rights reserved.