While much of my practice regarding children concerns negotiating or litigating custody and child support issues, my involvement does not end there. I spend a surprising amount of time as a matrimonial and family law attorney and certified divorce financial analyst dealing with one of my clients’ biggest mistakes: spending funds that should be earmarked for retirement to support their adult children.
The needs of adult children are generally not specified in divorce agreements. Once the child is emancipated, most often at 21, the responsibilities of the payor parent end. But it’s all too easy for the custodial parent to find him- or herself taking on debt faster than a leaky boat takes on water.
Here are some of the frequent ways parents give financial assistance to their adult children:
- taking out Parent PLUS or private loans for college
- adding the child as an authorized user on a credit card or paying off the child’s credit card debt
- paying rent or co-signing a lease
- co-signing or guaranteeing a mortgage
- co-signing or guaranteeing a business loan
- buying or leasing an extra car for the child’s use
- Groceries, cell phone, medical bills, etc.
- Keeping adult children on family health insurance plan
Census Bureau data shows that the percentage of adult children 25 to 34 years old living with their parents has been steadily creeping up since the Great Recession of 2008. That number has increased rapidly since the onset of the COVID-19 pandemic.
Surprisingly, many adult children who work full-time still depend on their parents to some degree. According to a 2017 Instamotor survey, nearly a quarter of fully employed millennials report that their parents pay at least one of their bills, even those who live independently. It’s interesting that around 36% of the adult children receiving financial support say their parents had no idea what they were earning, and 33% say their parents don’t know the cost of their bills and expenses.
A Merrill Lynch study found that the most common parental contributions are “food and grocery bills (60 percent), cell phone service (54 percent), car expenses (47 percent), school (44 percent), vacations (44 percent), rent (36 percent), and student loans (27 percent).”
The bottom line is that parents spend twice as much on adult children as on their own retirement—a whopping $500 billion to $250 billion.
What my clients don’t realize is the hidden cost of these outlays, which is the terrible hit these payments deliver to their retirement income.
“On average, a parent covering a child’s living expenses for five years and borrowing money for college tuition is missing out on $227,000—almost a quarter of a million dollars—in retirement savings.” That was among the findings of a July 2020 NerdWallet study, which includes a calculator where you can break down by category the monthly contributions you make to your children and see what the real cost will be to your retirement.
It can be difficult even to get married parents who are in agreement to stop doing too much for their kids to their own detriment. But when a custodial parent on a fixed or greatly reduced income engages in the same behavior, you have a recipe for disaster.
Unfortunately, the numbers alone don’t seem to help many of my clients to prioritize the needs of their future selves over the present needs of their children. So, I’ve had to plumb the underlying motivations of their behavior and try to offer alternative ways to help.
In my experience, clients say they jeopardize their own financial future for the sake of their children because they love them, but it’s not that simple. Some of the motivations include guilt over the divorce, fear of losing the child’s love if the previous standard of living is not maintained, the desire to achieve “most favored nation” status and be the preferred parent, denial or inertia. All or some of the above usually come into play.
What my clients find useful is gaining a perspective broad enough to encompass both their welfare and that of their adult child—and to see how attaining financial independence is actually beneficial for the child.
Let’s take as an example the case of a parent who took out a federal parent Plus loan for her son’s tuition. She had actually considered withdrawing from her 401K to spare him the burden of student debt when he graduated, so I was incredibly relieved she hadn’t done that! As Thomas Ausfahl, a principal at Greystone Wealth Advisors said in a recent conversation: “You can borrow for college, but you can’t borrow for retirement.”
When I asked her if tuition had been a factor in deciding which colleges her son had applied to, she became indignant. Shouldn’t her child go to the best school he was accepted to? The answer is probably no. A slight difference in “prestige” might not have been worth it, given her financial situation. Additionally, she didn’t realize that she could have negotiated the financial aid package once her son was accepted, particularly since he had gotten into more than one school.
At any rate, it would have been better to have her child borrow first because federal student loans have lower interest rates than parent PLUS loans.
Finally, I stressed to her the benefits to her child of having loans in his own name. Paying them off on time would give him the ability to build his credit rating (she could decide whether or not to help down the road). Furthermore, being invested in his own education would give him a priceless sense of pride and responsibility.
Of course, it’s important to be smart about how much debt your child takes on as student loans are difficult (although increasingly not impossible) to discharge in bankruptcy.
The main takeaway for my clients, though, is that protecting your own interests does not indicate lack of love. It is good for them to know where you and they stand.
Mindless self-sacrifice, in the end, benefits no one.