Baby Boomer Alert! Bankrolling your adult children may ruin your retirement. It’s happening now. “Family & Retirement: The Elephant in the Room,” a survey by Merrill Lynch and Age Wave, examined this issue. For those individuals, age 50+ with adult children, 68% have provided financial support to those adult children in the last five years. Parents are paying rent, transportation, medical expenses, student loan debt and other miscellaneous bills such as cable and cell phone service. In addition, many pre-retirees are supporting other family members including parents, in-laws, grandchildren and siblings. The amount of financial assistance can be thousands of dollars per year, making some pre-retirees feel like the family bank. This survey showed that many pre-retirees are willing to make sacrifices to help family members including working longer than planned, returning to work after retirement, and having a less comfortable lifestyle in retirement.
Why is this happening? Sometimes this choice is not conscious. People often don’t see any correlation between helping their children and a less comfortable lifestyle in retirement. Because they are pulling money out of current income instead of their retirement accounts, they can’t see the impact. They might just as well be taking the money directly from their retirement savings, because the excess spending on adult children prevents them from saving enough money to secure their own future. In fact, because the excess spending occurs in the years prior to retirement, they not only lose the money they spent on their adult children, they also lose any growth it would earn before and during retirement. And if they are reducing their 401k contributions to fund the lifestyle of their adult children, they are losing an important income tax break and increasing their current federal income tax liability.
Most people cannot afford to retire if they have to keep paying for their adult children. Make sure you are focused on funding your retirement goals first. Your children won’t be able to support you if they can’t control their own spending, and you won’t be able to support yourself if you don’t have enough money saved for your future.