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Your kids' 'failure to launch' could threaten your nest egg

May 18th, 2016 by ,    photos by

The financial consequences of supporting adult children


The family dynamics of the Baby Boom generation have evolved, and more parents of the Baby Boom generation are supporting young adults in what psychologists call “emerging adulthood” – the age between the end of adolescence and about age 30. Trouble is, this is having growing repercussions on the Boomers’ retirement plans as nesteggs shrink to support adult children in one way or another.

Why this phenomenon has taken root is, of course, a cause for much debate. It may be that Baby Boomers recall their own less-than-opulent lifestyles when they were children, and seek to soften the financial burdens for their own children. It may be that they are less than confident in their kids' abilities to fend for themselves, buying into the myth of the "slacker" generation (it's not true).

But the children of Baby Boomers also seem to be relying more on parents to keep funding the lifestyles that they’ve become accustomed to through their childhood and adolescence. It’s a bit of a vicious circle.

We now see young adults staying in post-secondary education longer and racking up sizable student debt. Some 33 percent of students graduate with a debt of $25,000 or more.

In addition to this, more graduates remain unemployed for one reason or another. Many can’t find work in their area of study – after all, how many jobs are there for history or social science majors? So a lot of grads end up going back to school to take “practical” courses at colleges – accounting or technology or other in-demand skills. According to Statistics Canada, the unemployment rate in the 16- to 24-year-old age group is 13.6 percent, compared with about 7 percent for the general population. It’s a problem.

So combine a big student debt with a tough job market, and you’ve got the perfect conditions for a trip to the bank of Mom and Dad.

Failure to launch

But that can become a slippery slope. Parents want to do the best they can for their kids, and often that leads to shielding them from the “school of hard knocks” well beyond their young-adult post-secondary years.

We have parents now paying for their adult children’s post-schooling lifestyle choices beyond the bare necessities – regular trips abroad, for example, or prime condos in downtown areas, fancy clubs and restaurants, first-tier smartphones and cellphone services. A recent poll by CIBC indicated that 47 percent of parents buy their adult children’s groceries, and 35 percent cover their cellphone bills. A whopping 25 percent of parents polled say they pay $500 or more per month to help their adult children with expenses.

And it gets worse as the increasingly dependent “emerging adults” truly fail to launch – we’re talking eventually footing the bill for full-scale “bridezilla” weddings (some into the six figures), payments for luxury cars, and then a down payment on a house, and even legal bills for divorce.

Are these people all independently wealthy? Did they win the lottery or something? I don’t think so. Most (some 66 percent according to the CIBC poll) are in fact dipping into their retirement nest eggs solely to prop up their adult children’s lifestyle.

Down the drain

Cutting your personal savings rate while drawing on existing savings is a recipe for really limiting your own retirement options. For example, if you had been saving $1,000 per month and putting it into an RRSP, you’d be saving $12,000 per year and getting a pretty good tax deduction. Over 10 years at, say, an average 7 percent annual rate of return, you’d end up with about $174,000. Now cut that savings rate in half, because you’re supporting Jimmy to the tune of $500 per month. After 10 years, you end up with $87,000. Quite a drop, just so good old Jimmy can go “find himself” in Aruba or somewhere.

Now if you’re also siphoning off existing savings, you’re in even bigger trouble. That’s because you’re slashing the capital you already have available for compound long-term growth. Remember, this is the money you’ve set aside for old age. Think about that savings example I just mentioned. Do you really want to cut that $500,000 retirement nest egg in half so that your 35-year-old son or daughter can buy a new house in downtown Toronto?

And these days, old age is getting noticeably older. Lifespans are increasing into the late 80s and early 90s for women. But age-related health issues mean there’s more need than ever to have that retirement nest egg ready to support yourself when you need to look for assisted living arrangements. But if little Jimmy or Sarah blow it now hanging with friends in Venice Beach, it’s unrecoverable, and it won’t be there for you when you need it.

Teach your children well

Other than closing the ATM outright, there’s no easy fix for untethering adult children from the bank of Mom and Dad. It can be incredibly stressful on the family dynamic if adult children have become accustomed to the magic cash flow over a long period, which is suddenly cut off.

I urge clients who find themselves in this situation to sit down with me to really take a cold, hard look at their financial plan. It’s vital to balance the desire to support your kids financially with the need to ensure your own long-term security. I find that a good way to bring things back into focus is to take a close look at the family financial plan, if there is one, and calculate the one single red-line amount you cannot cross without jeopardizing your own financial future. Then work with that fixed dollar amount if you still feel you must provide something for the kids every month. But you have to be firm. Better yet, start teaching your kids early, while they’re still in grade school, about the virtues of financial self-sufficiency.

Jun 26 2017 12:25am

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