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Are You Helping Your Children to Your Own Financial Detriment?

Polarizing post alert. I’ve had numerous conversations with people over the past year who provide or are considering providing financial assistance to their adult children.

I’ve seen a parent’s love in action. Many are willing to do whatever it takes to ensure their children don’t go without. I understand it when we’re talking about minors. It’s more difficult for me to get on board when we’re talking about adult children who, in my mind, ought to be able to care for themselves financially. Every rule has an exception, and I acknowledge I’m speaking in generalities.

It turns out there’s more than just my anecdotal conversations with adults as proof that parents helping adult children to their own detriment is “a thing.” More than “two-thirds of parents with adult children have made or are currently making a financial sacrifice to help their kids financially,” according to a Bankrate survey. Here are some areas where parents are short-changing themselves:

  • 43 percent have sacrificed their retirement savings
  • 51 percent have depleted their emergency savings
  • 49 percent have refrained from paying down their own debt
  • 55 percent have postponed reaching a financial milestone

Put Your Own Mask on First

Airline attendants tell parents flying with children to don their own oxygen masks before assisting their children in an emergency. That’s how parents might consider offering financial assistance to adult children. Make sure you’re on track for retirement before you spend your retirement funds on your children.

Here are a few facts parents should consider when determining whether to offer children financial assistance:

  • Withdrawing from your retirement accounts before age 59 ½ may result in a 10 percent tax penalty.
  • You could have a larger tax bill for the year of withdrawal because the withdrawn funds count as income. People often must withdraw additional funds to cover the taxes, which further depletes retirement savings.
  • Taking lump sums of money from your retirement accounts before originally anticipated may negatively impact your retirement goals.
  • You may lose out on some of the tax-free growth benefits.
  • You may experience diminished compounding power.

If you run out of money, who is going to help you financially?

What should you do instead? 

Have a financial plan in place, and review it periodically. Ask your advisor to create a scenario for offering financial assistance to your children and see how it potentially affects your future before you pull the trigger.

Parents can help create solid financial foundations by teaching their children money management skills such as:

  • The concept of living on less than you earn.
  • Saving a portion of their allowance or income from an after-school job for an emergency savings account.
  • Delaying gratification by saving for a purchase instead of buying it on credit.

Share your own financial stories if you grew up under different financial circumstances. This can help them understand not to take their situation for granted.

Be a good example for your children to observe. Help them understand your purchasing decisions. Teach them to save for big-ticket items instead of putting them on a credit card.

Establishing this knowledge early may increase your children’s likelihood of achieving financial independence.

As your advisor, I want your retirement savings to last you the rest of your life. If leaving money to your children or offering financial assistance is among your goals, let’s account for that in your financial plan.

August 2023

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