The "Bank of Mom and Dad" and Other Family-based Retirement Killers


The job market for millennials is far from rosy. Things began going south at an alarming rate following the collapse of 2008. According to federal data, the unemployment rate for workers 18-34  grew to nearly 14-percent by 2010.

In the ensuing years, that rate has dropped by five-percent . That number remains much higher than overall unemployment. Additionally, millennials are indebted to student loan lenders to an astounding degree. 

These larger economic forces have led many adult children to return home post college. There's even a name for them: "The Boomerang Generation." According to a Pew survey, 36-percent of people 18-31 were living at home in 2012. That was the highest rate in more than 40 years. The situation is compounded by the fact that millennials aren't getting married.

This isn't entirely bad for all involved. If you're an adult child struggling to pay your bills, it's often a lifeline. Research has shown that Boomerang children will be able to retire five years earlier than those who move out before or after college. One caveat: They have to invest or save they money they'd otherwise spend on rent and mortgages.

Yet what about the parents? Unfortunately, many of them aren't so lucky. There's a name for this, too.

"The Bank of Mom and Dad."

The Bank of Mom and Dad and other retirement red flags

Parents want the best for their kids. Often, that desire to help leaves them with depleted savings and precarious retirement prospects. That's especially true now that 401ks have largely replaced pensions. Today, planning for retirement requires more work and more discipline.

Taking on financial burdens to bail out an adult child is a recipe for disaster. A few thousands dollars a year may not sound ruinous. Yet there is a serious opportunity cost attached to spending, rather than investing, that money.  

While adult children have had a tough go recently, we can't neglect the other end of the spectrum -- elderly parents. The combination of adult children who haven't launched, and elderly parents who need intensive care, can bust almost anyone's budget.

If we're going to point the finger at the old and the young, we can't let ourselves off the hook. Failure to plan for our own long-term care is a classic retirement buster. The same goes for failure to insure ourselves in the case of illness or death of a partner.

Finally, even if we have family obligations to consider, it's critical that we avoid carrying large amounts of debt into retirement. As your retirement runway starts to disappear, so should your debt.

Action Plan: Avoiding family-based retirement killers

Helping out family members is a priority for almost everyone. That's understandable. Yet if you compromise your own financial health in the process, you aren't helping anyone. Dig yourself a hole today, and your children will be assuming the burden tomorrow.

While there might be some ironic justice in such a scenario, the smart solution is to avoid creating any problems at all. In order to do so, consider the following:

  • Distinguish between essential support of adult children and non-essential. Helping out with debt or living expenses is one thing. Paying for gym memberships or leisure pursuits are another.
  • Don't set a bad precedent. Providing support in emergency situations is OK -- if you can afford it. Repeatedly giving money for non-essential items perpetuates dependency.
  • Do not co-sign for loans. This goes doubly for unsecured private student loans. This is one of the fastest routes to retirement penury.
  • If you loan your children money, set up a repayment schedule. Charge market interest. 
  • Offer non-financial support. This could mean help landing a job, child care etc.
  • If you have elderly parents, ask them about long-term planning. This means insurance, health care policies, money set aside for care, etc.
  • Don't wait too long to set up your own long-term care protocol. Insurance gets more expensive as you age.
  • Resist the urge to parcel out an early inheritance. You may need the money later -- and they may come back for more money anyway.

When it comes to family members, money is often no object. Yet this passionate concern for the well-being of our loved ones can undermine rational financial thinking.

By following the steps outlined above, you can help your family without placing your retirement in jeopardy.

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