Parents have long supported their adult children. Traditional areas for contribution include education, weddings, and first homes. However, recent data suggests that parents are subsidizing their children’s lives more than ever before. This support often extends to areas traditionally under the child’s purview, an alarming reality for parents approaching retirement. This article explores various macro-economic and attitudinal factors contributing to the phenomenon. Following are considerations, strategies, and potential solutions for forward-looking parents.
A recent Bankrate report unsettled financial planners across the industry. The survey found that nearly 70% of parents have sacrificed their own finances to assist their adult children. Over half of these parents say they are forgoing debt payments and even tapping emergency savings. A majority also say they are delaying or abandoning important financial milestones, such as retirement. Lower income households are more likely to extend financial support, further complicating the problem.[1]
This data is undoubtedly concerning. However, the findings should not surprise anyone following the financial news. Inflation hovers near record-high levels and recession risks loom. A review of recent trends may provide context and inform potential solutions.
Trends Impacting Young Adults
Today’s graduates face many financial hurdles. Student debt loads and rising housing costs severely limit saving capacities. Both obstacles are made worse by surging interest rates. Behavioral factors may also play a role, as research suggests that financial values have evolved considerably among recent generations. Regardless, young adults are increasingly poorer, indebted, and dependent.
The student debt crisis is well-documented. Nationwide, over 50% of students graduate with debt. Student debt loads vary widely by state. Average student debt totals range from $18,350 in Utah to a whopping $39,950 in New Hampshire.[2] Experts say that many factors are to blame. Primary culprits include surging tuition costs, federal loan guarantees, and increased labor competition. Perhaps more relevant are the consequences of student debt.
Student loans meaningfully impact long-term wealth accumulation. Individuals with student debt may delay marriage, homeownership, and graduate programs. Monthly student loan payments also limit available income for ongoing living expenses. It is no surprise that young adults, buried in student loans, are tapping family members for financial support. Student loan payments are expected to resume this year, further exacerbating this problem.
Housing costs are another meaningful hurdle. Pandemic-induced supply chain issues and recent interest rate hikes are obvious factors. However, today’s housing problem is years in the making. The Great Recession of 2008 triggered a rapid decline in both home values and new home construction. Population numbers climbed steadily while the economy teetered. Once the economy recovered, residential developers struggled to catch up. This supply and demand mismatch drove residential costs higher for nearly ten years.[3] Prices ballooned when the pandemic permanently altered American living habits. Young adults are disproportionately impacted by this housing crunch.
Inventory issues are wreaking havoc upon urban rental markets. This is especially true in economic hubs such as New York City and Boston. Rent continues to consume a larger proportion of young adults’ paychecks. This severely limits their ability to repay student loans, fund a future home purchase, or save for retirement.
Still, some speculate that these financial struggles are a self-fulfilling prophecy. Research suggests that the transformative recession of 2008 left young adults distrustful of financial institutions. Many avoided markets, lenders, and informational resources as a result. Financial inaction worsened when pandemic uncertainty further emphasized a “here and now” mentality over practical financial goals.[4] Disillusionment may influence both short-term decisions and long-term outlooks. Some young adults prioritize spending on services and travel.[5] Others wish to invest but lack the knowledge or guidance to proceed. These shifts could surely compromise daily budgeting and future planning activities. If circumstances are bleak, why not enjoy today?
Attitudinal shifts may have real consequences for families. On average, young adults disagree with older generations over notions of financial independence. The biggest disparities appear to lie between Gen Zers and Baby Boomers. According to a recent survey, Gen Zers feel that young adults should begin paying certain bills one to three years later than Baby Boomers do.[6] These findings echo many living room disputes today.
However, other surveys suggest that financial woes are purely circumstantial. A recent study ranked retirement preparation and emergency savings as top priorities for millennials.[7] Researchers also found that millennials are saving earlier than previous generations.[8] There is evidence that members of Gen Z are similarly pragmatic. Surveyors found that Gen Zers are more likely to research purchases and seek discounts than other generations.[9] While the causality debate continues, financial conditions worsen.
Recent economic forces have aggravated grim circumstances. Price increases strain existing debt loads, and interest rate hikes preclude first home buyers. Parents continue to pick up the slack, sometimes to their own detriment.
Considerations and Strategies
Family support is a central goal for many. However, parents must first evaluate whether such assistance is feasible. By now, most are well aware of the oxygen mask analogy. Parents should secure their own financial situation before helping others. Key considerations include lifestyle goals, health care needs, and saving objectives. A detailed analysis can assess income flows, spending requirements, and retirement preparedness.
Giving analyses are highly individualized, but certain rules-of-thumb exist. Parents should never draw down emergency savings. Such an action severely jeopardizes financial stability for the whole family unit. Parents should also avoid tapping retirement accounts, as early withdrawals can be subject to a 10% penalty. The instinct to provide is commendable, but unsound actions can undermine financial viability.
There are several strategies for those able to provide support. Well-heeled parents may transfer outright cash to their children. The recipient, in turn, can spend these funds as desired. Some parents, however, prefer a more targeted approach. For example, parents may choose to cover the child’s annual health insurance deductible, car insurance costs, or student loan payments. Others wish to bolster their children’s investments. This can be accomplished by contributing cash to a child’s IRA or shifting tax-sensitive stocks to his or her brokerage account. Targeted giving can invite important conversations around budgeting, saving, and investing.[10]
For some, outright gifts may not be desirable or possible. Parents may instead loan funds to a child. Loans satisfy three purposes. First and foremost, parents will be repaid. This secures funds for future spending needs and may relieve some uncertainty. Secondly, intra-family loans can encourage financial responsibility. The child is accountable for repayment and must plan accordingly. Thirdly, intra-family loans can offer far superior terms to the commercial lending market. Children may receive flexible payment schedules, avoid damaging credit inquiries, and enjoy lower interest rates.[11] Loans are an excellent compromise for suitable families.
Regardless of strategy, communication and expectation setting are important components to this process. Family finances can be a positive and supportive topic, but dynamics can easily degrade without the proper foundation.
Looking Forward
Many parents face difficult dilemmas between support and self-preservation. Decisions are often best contemplated through a simple thought experiment. Can my finances support myself and my children? Will this gift significantly impact my own livelihood? Will I need these funds at a later date? A competent financial planner can help families navigate these deliberations.
Parents are also reminded that financial education begins at a young age. Experts say that childhood lessons can teach key principles such as delayed gratification and financial independence. Lessons may become more complex and sophisticated over time. As the child matures, parents can assist in opening a savings account for summer job earnings. Eventually, the child can fund an investment account and learn the benefits of compound interest. This successive process encourages financial autonomy.[12]
Financial support is a delicate balancing act for many families. Dynamics become increasingly complex as children grow and needs arise. It is critical that parents remain judicious. Gifts should only be extended when circumstances permit. Parents should also facilitate financial independence over time. After all, it is said that experience is the only free lunch.
Bryce Schuler, CFP®
Financial Advisor
Baldwin & Clarke Advisory Services, LLC
Email: bryceschuler@baldwinclarke.com
[1] Gillespie, Lane. “Survey: 68% of parents have made a financial sacrifice to help their adult children with money,” Bankrate, 10 April 2023.
[2] “Student Debt and The Class of 2020,” The Institute for College Access and Success, May 2020.
[3] Other contributing factors include limited land, restrictive zoning, and concentrated job growth.
[4] Sardon, Maitane. “A Guarded Generation: How Millennials View Money and Investing.” Wall Street Journal, 13 March 2020.
[5] Carpenter, Julia. “The High Financial Price of Burning Out at Work – and What to Do About It.” Wall Street Journal, 10 October 2021.
[6] Gillespie, Lane. “Survey: 68% of parents have made a financial sacrifice to help their adult children with money,” Bankrate, 10 April 2023.
[7] “From Investing to Budgeting, How Millennials Are Disrupting Personal Finance.” CB Insights, 1 December 2021.
[8] “Millennials are known as avocado toast-loving, latte-swilling spendthrifts – here’s the reality.” CNBC, 13 April 2021.
[9] Barton, Christine et al. “COVID-19 Consumer Sentiment Snapshot #7: Retracing the Old Normal.” Boston Consulting Group, 17 April 2020.
[10] The 2023 gift tax exclusion permits individuals to give up to $17,000 per recipient, regardless of gift type. More complex giving strategies are available to families with estate tax exposure.
[11] Intra-family loans with below-market interest rates may trigger gift tax consequences.
[12] Milkovits, Beth. “A Guide to Talking to Your Children About Money.” Brown Brothers Harriman, 18 October 2017.
