COVID-19 has caused some obvious struggles: while health and finances have often been sources of stress, the coronavirus has shined a spotlight on where our strengths and weaknesses are – both personally and globally.
The same can be true of family dynamics. Since many of us have been sheltered-in-place, that can put a strain on the best of relationships – especially when it comes to finance. With the ups and downs of the job market and the economy, many families are looking at where they stand financially.
As wealth managers, we always hope that spouses are on the same page when it comes to money. But what about adult children? As a parent, you’ve spent your whole life protecting your kids from harm, spending your time nurturing their happiness and success. So, it can be devastating to watch them struggle.
A natural reaction is to want to “fix it” and use your own finances to prop them up financially. While it’s a completely understandable to want to help…should you?
Focusing on the money, not the heart
Having a big heart is a great quality and wanting to help your adult children with their finances when they’re struggling is very noble. However, you must also think of the long-term effects to your own future.
As you approach retirement or are recently retired, the power of compounding interest starts to work double-time in your favor. When financial advisors plan for your future, these are critical years to prop up your own financial independence. Taking money that was meant to be saved or pulling from your retirement assets will not just hurt you in the long run…it will actually hurt your children as well.
Part of the reason we focus so much on holistic planning with our clients is to show what must be done to financially insulate their retirement. By having a plan in place, they know what must be put away and built for their well-being. Once this bucket is filled and if there is excess cash flow, then helping adult children can become a consideration.
Here’s an example
Imagine you’re 45 years old and want to retire at age 65. After talking to your financial advisor you learn that you need a little over $1.5M to retire at age 65 when factoring in Social Security. You’ve already managed to save $300,000 and assuming 6% growth you determine you must save $20,000 annually to reach your goal to retire at age 65. Assuming 6% growth, you’ll have $1,762,821 at retirement!
Now imagine the same scenario – but you have adult children who both need your help with rent. You feel bad and know they’re in a pinch, so you agree to help pay $500 per month for both ($1000 total). Using these same assumptions, your nest egg when you’re 65 is now only $1,300,780.
That’s close to a $500,000 difference.
And what’s $500,000 in terms of your retirement income? Well, assuming 4% of investment income is used to support your lifestyle, that’s $20,000 less per year you can spend in retirement. Not to mention that pulling more from your accounts to make up the difference means you’ll deplete your money much quicker over time. If you’re saying that doesn’t bother you and your focus is making your children happy, then let’s look at it from their perspective.
The long term-impact on your children by helping them now
Using our previous analysis, let’s assume the loss of $500,000 of retirement savings causes you to deplete your retirement by age 85 instead of age 95. Using the best-case scenario of an additional $20,000 needed to supplement your retirement for 10 years, your children now must support you at almost double the rate that you supported them. Your out of pocket was $12,000 annually, and now they must come together to help pay $20,000 to help you. Not to mention, what about medical expenses? Assisted Living facility? Burial expenses?
While it comes from an amazing place of caring for your loved ones, unless you’re financially secure it could be a disservice to the future wellbeing of your children to help them if you aren’t taking care of yourself first.
Have questions about your own finances when it comes to your family? Let’s talk about it so you have a clear understanding and an impartial advisor who can help you look at this often-emotional scenario. At DPWM, we work with our clients to develop financial plans and actionable items so they know how to take care of their financial future.
Denver Private Wealth Management is an independent fee-based financial planning practice with 50+ years of experience in the financial industry. DWPM customizes portfolios based on your financial goals and works closely with you, your tax advisors and estate attorneys to form a comprehensive view of your financial situation. For more information or to set up a free consultation, contact us at firstname.lastname@example.org.
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