Watching clients bail out adult children is like a ‘slow train wreck’
Just before takeoff, flight attendants tell passengers that in the event of an emergency, they should fix their own mask before helping others — including their children. After all, a person can better assist others once they themselves are more secure. But realistically, how many parents are going to do that?
Multiple advisors use the airplane analogy to illustrate how parents often go to extremes to help their children financially — no matter what age — often without regard to their own long-term financial well-being.
“It’s a strong urge, any parent out there knows,” says James Nichols, Voya Financial senior vice president of customer solutions. “It’s very hard to say no to a child in need.”
Indeed, a 2017 survey of 1,092 U.S. adults with children ages 18 and older found that 74% of parents admit to having helped their adult kids pay living expenses or reduce debt, according to Creditcards.com — a credit card comparison and data services platform. That’s a rise from 61% of parents who helped adult children in 2015, according to a similar survey conducted by Pew Research Center at the time.
Parents mostly admitted to helping their adult children with common living expenses such as cellphone bills (39%), transportation, (36%), rent (24%) and utilities (21%), according to Creditcards.com. Paying off debt was a bit less common, but still many parents foot the bill for their grown children’s student loans (20%), auto loans (19%), medical debt (17%) and credit card bills (16%).
For a bulk of their child’s life, parents are the sole caretaker when it comes to financial needs, so it can be hard to cut the cord in that respect.
“They've always been there for their kids and a cry for help evokes a knee-jerk reaction to jump in and rescue the adult child from a financial crisis,” explains therapist Kathy McCoy. “Maybe the parent is in denial about his or her own financial limitations or has a fantasy that down the road, the adult child will turn around and help him or her.”
But advisors warn that helping an adult child too much with money could end up damaging the parent’s retirement or long-term-care savings plans. And as a result, parents could end up becoming a burden to their child later on.
For the advisors’ part, the key to avoiding this mistake starts at the onset of their relationship with the client. It entails coming up with a thoughtful plan that includes going over the ‘what if’s’ and thinking about every contingency and possible outcome.
If a parent is insistent on giving their adult child money for whatever purpose, creating a plan for those funds is paramount, advisors say. It would be a mistake for a parent to hand the cash over with no idea in place regarding repayment.
“The more structure you can put around that process of providing support the better chance [clients] will have at successfully achieving future financial security for both parties,” Nichols says.
This is also a prime opportunity for the advisor to meet with the adult child and not only bring objectivity to the situation with the parents but possibly bring in a new client.
But even the best laid plans can’t compete with the parental bond, and to the frustration of advisors, clients still fork over money to their adult children, even when they shouldn’t.
Wells Fargo advisor Mark Levy has seen clients deplete their retirement savings in order to help their adult child after already coming up with a plan that outlined how they could spend during those years.
“They aren’t investing like they should and they have really tepid projections for future stock market returns,” advisor Austin Colby says.
A couple in their 60s had vastly different plans for retirement: One spouse envisioned Florida, the other Chicago.
Advisors have very little power to fix the health care system, but they can help others manage skyrocketing medical costs.
“It’s money that [clients] can ill afford to spend on an adult child,” Levy says. “So what we begin to see happen often is that in the beginning the parent feels they can afford it because there is a lot of money in the IRA accounts and in the savings accounts.”
But what they fail to recognize is that this will end up diminishing their investment returns as time goes on, because clients are withdrawing more than a portfolio can sustain. In the meantime, many are faced with the notion of selling their homes and renting. And a number of them have become depressed, Levy says.
“The more [money] they pull, the less there is working to generate growth [and] it becomes a vicious cycle,” Levy adds. “You can almost see it happening; it’s like a slow train wreck.”
But this isn’t just a financial issue; it’s also an emotional one. One of Levy’s clients, a doctor with a wife and two children, is currently in a worrisome situation. The doctor takes care of his son, who is on the autism spectrum and his divorced daughter with a family of her own.
“He has great standing in his community and everybody thought he was the wealthy doctor in town, and he was,” Levy says. “But a divorced daughter and the expenses that go along with keeping that person and her family whole, a son who is on the spectrum needing state help…all of these things depleted their life savings and now they’re very worried as the savings continue to deplete.”
The problem in these situations is there isn’t much an advisor can do to help once it gets this bad.
“I can only give them my best advice, I can only show them what it’s going to look like financially,” Levy says. “I can explain it to them, but at the end of the day it’s their decision to make and I see it often.”