Giving parenting advice is a touchy business, but financial planners may find themselves counseling clients to lower their children's expectations.

Should your clients cut back on retirement savings to fund college? Can the kids handle loans for college and grad school? Do they have a realistic idea of their own earning prospects?

Gen Y is brimming with confidence and optimism, says Kit Yarrow, author of Gen BuY: How Tweens, Teens and Twenty-Somethings are Revolutionizing Retail Today, and a professor of psychology and marketing at Golden Gate University.

One sign of their high spirits: Gen Y apparently hasn’t signed on to the “New Frugality" that is popular (at least in theory) post-recession.

Most of those who cut back during the recession say they’ll return to their former spending patterns. According to a report from the Pew Foundation, only 33% of the 18-29-year old set say they’ll continue to spend less, compared to more than 40% of adults ages 30 to 64.

That’s perhaps not surprising. It’s reasonable to expect your standard of living to improve as your career advances. The question is whether today’s young are realistic about their future.  

“As a product of the self-esteem movement, they have high expectations of their earning potential. They view setbacks as temporary,” Yarrow says.

Psychology research suggests that the thrifty are more anxious and optimism can contribute to over-spending. Yarrow believes that too many Gen Y parents are overindulgent, with some even tapping into  retirement funds in order to shield their kids.  The trend may be decreasing a bit: In a 2010 Rasmussen Reports survey for Country Financial, the insurance and investment firm, only 41% of parents said that saving for their kids’ college was more important than retirement, down from 47% in 2009.

Among  Americans ages 18-29, however, 15% said parents shouldn’t have to finance any of the costs of higher education for their kids, suggesting confidence that they could handle their own college loans.

In the Pew report, the young were also most upbeat about prospects for their own children. Among those under age 30, 64% say their children will enjoy a better standard of living, compared to 47% of those ages 30-49 and only 35% of those ages 50 and older.

Meanwhile, teen financial literacy has actually declined since 2006. A Merrill Lynch funded survey found that only 48% of high school seniors understood that paying off a credit card balance saves money.  And median credit card debt of college students has increased 58% in the past year.