Countless headlines warn that people are not saving enough for retirement. If you’re a parent, one factor that might be holding you back on the savings front is providing too much financial support for your adult children. As ironic as it might seem, that could hurt more than your own financial security; it could hurt theirs.

A slow path toward independence

According to a 2018 study by Merrill Lynch and Age Wave, 79% of parents of “early adults” (ages 18-34) provide them with some type of financial support. And not just during their children’s earliest adult years, when they might be helping cover the cost of college. The study noted that “these contributions can continue long after college graduation.” Common ongoing financial support categories include groceries (37% of parents with adult children provide some help with their food expenses, 23% pay all of the cost); cell phone bills (22% some, 32% all); car expenses (30% some, 17% all); and vacations (23% some, 21% all).

Many parents also help pay for large one-time expenses, such as a wedding or the down payment for a home.

One increasingly common scenario is adult children moving back home after college, potentially driving up how much their parents pay for food, utilities, and more. Toward the end of 2021, 46% of 18-to-34-year-olds were living in their parents’ home. While this number spiked to 52% in the first year of the COVID-19 pandemic, the current level is the same as before the pandemic and sits just below the previous all-time high of 48% seen during the Great Depression.

A separate study by savings.com found that 62% of adult children who live with their parents contribute nothing toward helping with household expenses.

Willing to sacrifice

While many parents are already providing financial assistance to their adult children, many others stand ready to do so. According to the Merrill Lynch/Age Wave study, 82% of parents said they are willing to make “a major financial sacrifice” for their adult child. More specifically:

  • 50% are willing to draw down their savings;
     
  • 43% are willing to live a less comfortable life;
     
  • 26% are willing to take on debt;
     
  • 25% are willing to pull money from a retirement account (a Bankrate survey found that 50% of respondents had sacrificed or are sacrificing retirement savings to help adult children financially);
     
  • 19% are willing to retire later/work longer;
     
  • 14% are willing to refinance a house;
     
  • 8% are willing to come out of retirement.

An emotional and financial disconnect

Many of those providing assistance don’t seem concerned about the impact on their own finances. In fact, according to a UBS study, 80% of Baby Boomers who are providing financial help to their adult children said they feel good about being able to help. However, it’s noteworthy that many recipients feel otherwise. Half of millennials (ages 25-40) who are on the receiving end of parental financial support said they feel some shame, frustration, or guilt over it.

And in some cases, that financial “help” may be hurting. In the classic book, The Millionaire Next Door, authors Thomas Stanley and William Danko said their research found a direct negative correlation between “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 said recipients of such gifts often end up financially dependent for the cost of other home-related items, such as furniture and landscaping.

What are parents to do?

Ideas for parents to consider include:

  • While it can be difficult to do this, especially if your adult children truly are in need, try to prioritize your retirement-related financial needs over the financial needs of your adult children.
     
  • Clearly communicate what expenses you plan to stop covering for your adult children and by what age. When will they be on their own for health insurance, car insurance, cell phone service, and other bills?
     
  • If your adult kids need or want to move back home for a time, will they be expected to help with some of the bills?
     
  • Use the Envestnet MoneyGuide software to see specifically how various types of financial support for your adult children may impact your retirement plan. (MoneyGuide is available to SMI Premium-level members for a $50 one-time fee.)

Here are 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.

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 strongly cautioned about cash gifts 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.”

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.”