How adult children can wreck your retirement

Failure-to-launch syndrome can derail your savings

More than one in three Canadians aged 20 to 34 are living with their parents according to the most recent census results from Statistics Canada. Worse yet, parents are still financially supporting them. That can lead to a series of problems, including threatening parents’ retirement nest eggs.

A 2019 RBC poll found that 96% of parents with adult children between the ages of 18 and 35 have supported those children financially in some capacity after they reached legal age, mostly for education costs (69%), living expenses (65%), and cellphone bills (58%). Nearly half of parents with children 30 to 35 are still providing support. Support averages $5,600 per year for adult children between 18 and 35, and $3,700 per year for children 30-35.

This can have a serious impact on parents’ retirement savings and may lead to postponing retirement entirely. This phenomenon may be the natural result of Baby Boomers seeking to soften for their own children the financial burdens they faced when young.

It may be that parents are less than confident in their kids’ abilities to fend for themselves, having bought into the myth of the “slacker generation.” While that’s not true, children of Baby Boomers (Gen-Xers as well as Millennials) also seem to be relying more on their parents to keep funding the lifestyles that they’ve become accustomed to through their childhood and adolescence (a lifestyle initiated and supported by their parents). It’s a bit of a vicious circle.

Young adults are also staying in post-secondary education longer and racking up sizable student debt. Some 33% of students graduate with a debt of $25,000 or more. And the debt doesn’t seem to bother many of them. More graduates remain unemployed for one reason or another. According to Statistics Canada’s Labour Force Survey of February 2019, the unemployment rate in the 15- to 24-year-old age group is 10.8%, compared with about 4.8% for the general population. It’s a problem.

Many can’t find work in their area of study or end up going back to school to take “practical” courses at colleges – accounting or technology or other in-demand skills. Many Millennials are consequently putting off what used to be major life stages, such as getting married, buying a home, and having children, as the combination of rising costs and unemployment or underemployment and inflated expectations leads to semi-permanent residency at the Hotel des Parents, funded by the Bank of Mom and Dad, for adult children in their late 20s or early 30s.

The slippery slope

Sheltering adult children can lead to shielding them from the “school of hard knocks” well beyond their young-adult post-secondary years. Think this is a myth? A poll by CIBC a couple of years ago indicated that 47% of parents buy their adult children’s groceries, and 35% cover their cellphone bills. A whopping 25% of parents polled say they pay $500 or more per month to help their adult children with expenses.

And it gets worse as the increasingly dependent “emerging adults” truly fail to launch – we’re talking eventually footing the bill for full-scale “bridezilla” weddings (some into the six figures), payments for luxury cars, and then a down payment on a house, and even legal bills for divorce.

Are these people all independently wealthy? No. Most (some 66% according to the CIBC poll) are in fact dipping into their retirement nest-eggs solely to prop up their adult children’s lifestyle.

Retirement down the drain

This is a big problem for parents who find themselves in this situation, for a number of very important reasons.

Limiting retirement options. Cutting your personal savings rate while drawing on existing savings is a recipe for really limiting your own retirement options. For example, if you had been saving $1,000 per month and putting it into an RRSP, you’d be saving $12,000 per year and getting a pretty good tax deduction. Over 10 years at, say, an average 7% annual rate of return, you’d end up with about $174,000. Now cut that savings rate in half, because you’re supporting Jimmy to the tune of $500 per month. After 10 years, you end up with $87,000. Quite a drop, just so good old Jimmy can go “find himself” in Costa Rica or somewhere.

Cutting capital. Now if you’re also siphoning off existing savings, you’re in even bigger trouble. That’s because you’re slashing the capital you already have available for compounded long-term growth. Remember, this is the money you’ve set aside for old age. Think about that savings example I just mentioned. Do you really want to cut that $500,000 retirement nest-egg in half so that your 35-year-old son or daughter can buy a new condo in downtown Toronto?

Older old age. These days, old age is getting noticeably older. Lifespans are increasing into the late 80s and early 90s for women. But age-related health issues mean there’s more need than ever to have that retirement nest-egg ready to support yourself when you need to look for assisted living arrangements. But if little Jimmy or Sarah blow it now hanging with friends in Venice Beach, it’s unrecoverable, and it won’t be there for you when you need it.

Teach your children well

Other than closing the ATM outright, there’s no easy fix for untethering adult children from the Bank of Mom and Dad. It can be incredibly stressful on the family dynamic if adult children have become accustomed to the magic cash flow over a long period, which is suddenly cut off.

I urge clients who find themselves in this situation to sit down with me to really take a cold, hard look at their financial plan. It’s vital to balance the desire to support your kids financially with the need to ensure your own long-term security. And that often means some frank, cards-on-the-table financial discussions with all involved.

Many parents with Millennials still at home adopt a “room-and-board” policy. As long as the mature offspring live under the same roof, they will be required to contribute a pro-rated amount of home maintenance, food, and expenses. If this means working as a barista at the local Starbucks until the real things comes along, so be it.

A good way to bring things back into focus is to take a close look at the family financial plan, if there is one, and calculate the one single red-line amount you cannot cross without jeopardizing your own financial future. Then work with that fixed dollar amount if you still feel you must provide something for the kids every month. But you have to be firm. Better yet, start teaching your kids early, while they’re still in grade school, about the virtues of financial self-sufficiency.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.