Countless headlines warn that people are not doing enough to prepare for retirement. Mostly, the reports say, people aren’t saving enough.

But for many near-retirees, another factor is putting their later-life financial security at risk: providing financial support for their adult children. And as ironic as it might seem, if you’re supporting an adult child financially, you may be harming more than your own financial security; you may be harming theirs too.

Not part of the plan

Of all the inputs that go into making a traditional financial plan, the potential need to help a loved one, such as an adult child, is typically left out of the equation. According to a Merrill Lynch study, 88% of people age 55+ have not taken such a possibility into account. And yet, among parents age 55 or older:

  • More than two-thirds (68%) have provided some form of financial support to their adult children during the past five years: 20% said it went to help with the rent or mortgage, 18% for cell phone bills, 17% for car payments, 15% for healthcare expenses, and 11% helped with student loans. Interestingly — or perhaps, alarmingly — 36% did not know how the money was used.
  • One in five (19%) have at least one “boomerang” adult child who has moved back to their parents’ home.

To that last point, a separate study by the Pew Research Center found nearly one-third of 18-to-34-year-olds are now living in their parents’ home. It’s the first time in 130 years that people in that age group are more likely to be living with their parents than with a spouse or roommate in their own household.

Even those who don’t need help, get it

While much has been made of how difficult it can be for today’s young people to find work, it isn’t just the parents of struggling young people who are doling out financial assistance. UBS studied affluent Millennials (people ages 21-36 who make $100,000 or more or have at least that much in investable assets). It found:

  • Many are receiving parental support for necessities, such as health insurance (29%), home buying/renting (28%), auto insurance (26%), and utilities (23%) — and also for discretionary uses, such as spending money (21%) and vacations (19%).
  • Nearly two-thirds (63%) moved back home after graduating from college.

Willing to sacrifice

Clearly, many parents are already providing financial assistance to their adult children. Many others stand ready to do so. According to a study from BMO Harris Premier Services (pdf), when asked what they’d be willing to do in order to provide assistance if their adult children needed financial help:

  • 47% said they would be willing to retire later than planned;
  • 25% said they would take on debt;
  • 20% said they would make withdrawals from their retirement savings.

An emotional and financial disconnect

Those providing the assistance don’t seem concerned about the impact on their own finances. In fact, according to the UBS study, most (80%) Baby Boomers who are providing financial help to their adult children say they feel good about it.

Many recipients feel otherwise. More than half (52%) of those on the receiving end say they feel some shame, embarrassment, or guilt over it.

Of course, if you aren’t saving enough for your own needs (such as retirement), helping an adult child financially is not a good idea. And, even if you can afford it, as counterintuitive as it may feel, such support may actually hinder your adult child’s financial future.

In their classic book, The Millionaire Next Door, authors Thomas Stanley and William Danko looked at the financial habits of people with a net worth of at least $1 million. They found a direct correlation between what they call “economic outpatient care” (parents providing money to their adult children) and the recipients’ ability to build wealth.

“In general,” they wrote, “the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more.”

As Stanley and Danko looked more closely at the dynamic of parents giving their adult children money, they also found that:

  • “Giving precipitates more consumption than saving and investing.”
  • “Gift receivers in general never fully distinguish between their wealth and the wealth of their gift-giving parents.”
  • “Gift receivers are significantly more dependent on credit than are non-receivers.”
  • “Receivers of gifts invest much less money than do non-receivers.”

The authors say many givers assume economic outpatient care will “get the youngsters going” and then won’t be needed anymore. That’s often the motivation, for example, behind helping with the down payment on a house. However, Stanley and Danko say recipients of such gifts often end up financially dependent for the cost of other home-related items, such as furniture and landscaping.

Selective support can help

Stanley and Danko said their research doesn’t close the door on all forms of financial assistance for adult children. Some, such as subsidizing a college education or helping to fund a business, can have “a strong positive influence on the productivity of the recipients.”

However, they had strong words of caution about cash gifts that are knowingly earmarked for consumption: “We find that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.”

Other guidelines suggested by the affluent parents Stanley and Danko studied:

  • Never tell children your family is wealthy.
  • No matter how wealthy you are, teach your children discipline and frugality.
  • Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.
  • Never give cash or other significant gifts to your adult children as part of a negotiation strategy.
  • Teach through example that there are a lot of things more valuable than money.

Perhaps the authors summed it up best when they wrote, “Discipline and initiative can’t be purchased like automobiles or clothing off a rack… Teach your children to live on their own. It’s much less costly financially, and, in the long run, it is in the best interests of both the children and their parents.”