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Financing The Boomerang Tax

Joseph Crowley, CFP®
May 21, 2019

Financial Planning and Supporting Children

In 2018, Zillow released a report estimating that nearly one third of college graduates will move back home with their parents. For some parents, that outcome is a dream come true. For others, it’s a nightmare. Regardless of how you feel emotionally, it’s important to understand the financial impact of indefinitely supporting children after graduation day.

How can this increase in aid towards children be explained? The sudden expansion in support for adult children is usually linked to rising education expenses, increasing housing costs, stagnant wage growth and numerous additional factors.In one way or another we all want to support those that we care about. What few take the time to calculate is the impact that support can have on their own financial well-being. Understanding and accepting those impacts leads to a higher probability of reaching goals and reducing the chances of unfortunate surprises down the road. As with many decisions, it all starts with a plan.

Determine an Amount

The first step towards successfully supporting post graduates is to determine an appropriate dollar amount. It is estimated that in 2018, Gen X and Baby Boomer parents spent roughly $500 billion in support for their children. That figure equates to twice the amount those same generations were saving towards retirement. Student loans, housing, car payments, food, healthcare, cell phones, and even babysitting costs can add up quickly. Is the support a fixed amount or will it vary month to month?

Review Funding Options

Possibly the most important factor, how will the expenses be covered? Cash flow, savings, and even debt are all options, but what is the optimal strategy? In a financial industry study of 2,500 parents, almost a quarter stated they would be willing to pull from retirement savings or take on debt in order to support their children. Each funding method will have a different short and long-term impact.

Establish a Duration

Not many individuals are fortunate enough to gift a lump sum of cash to their children that will support them for years to come. What's more likely, is that support will be a reoccurring monthly or annual expense. How long will that expense continue? Will there be years where cash flow is altered leading to a change in support? Don't plan around support ending once your child gets their first job as many starting positions may not provide the necessary salary to substitute your gifting. It's more likely there will be a gradual decrease as they begin to earn more, pay off debts, and become more self-sufficient.

Who Will Benefit

Parents with one child have it easy when it comes to support. They don't need to constantly worry about keeping everything equal between their children. In many cases, the eldest child will receive financial support and it's not until years later that the next child is complaining about their own circumstances. Are there multiple children who will be receiving support? If so, what years will there be substantial overlap and how does that affect your funding strategy?

Analyze the Impact

In the same financial industry study referenced above, it was found that 79% of parents were financially supporting adult children. Whether this be for gas, groceries and cell phone bills or student loan, car and housing payments, one thing is certain, this continued financial support will have an impact on the generation providing it. That's why understanding the cost of financial support and the long-term impacts is so crucial. If supporting children is a priority, the added expenses should be accounted for in order to determine what may need to change in order to reach other goals. Does retirement need to be delayed? A dream vacation put on hold?

Stick to Your Plan

A well-constructed plan serves no purpose if abandoned. Having well-defined goals leads to a stronger commitment to keep them. Determine how much support you are willing and able to give to your children in advance. Explain your gifting strategy and timeline to them. Stick to your plan.

Almost all parents can agree that taking care of their children is one of, if not the most important goals in their lives. We all want to support those we love whether that be emotionally or financially. Communicate with your children so they have time to plan for their own responsibilities. Know and explain boundaries. Finally, consider introducing adult children to your own financial advisor. Chances are your kids are just as interested in planning their financial independence as you are.

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Joe Crowley is a Financial Planning Specialist at Exchange Capital Management.  The opinions expressed in this article are his own.