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The Tom Joyner Show
Money Mondays

March 25, 2019

One Threat to Your Retirement Could Be Your Kids
Mellody Hobson on the Tom Joyner Morning Show - Money Mondays
Mellody discusses why it’s important to resist the urge to help your kids too much.
Today we are talking about how parents’ generosity toward their children can hurt their retirement. Why is that on your mind?

There was a great article in Barron’s this past week, which highlighted the many ways parents can put their retirement at risk by prioritizing their children financially. In a 2018 Bank of America Merrill Lynch and Age Wave survey, nearly 3 in 4 parents put their kids’ needs ahead of their own retirement. The same survey found nearly 80% of parents give some financial support to their adult children – those in college or beyond. What is more, the sum of that assistance comes to a whopping $500 billion annually, double the amount that parents contribute to retirement accounts every year! Considering how many Americans are already behind when it comes to saving for their golden years, I wanted to discuss some ways parents can strike a healthy balance between their own future and that of their children.

Wow! Parents are giving twice as much money to their adult kids as they are contributing to their retirement. What is driving this trend?

Educational costs are the key contributor, Tom. According to the article, four-year private college education costs nearly $48,500 a year, twice the amount it cost in the 1980s. Many parents want to help their kids avoid student loans, and so they forego contributions to their retirement fund. Indeed, T. Rowe Price survey found 70% said they would be willing to delay retirement to pay for their children’s education. Worse, many parents are taking on debt to pay for their kids’ college bills. According to Federal Reserve data, between 2001 and 2016 education debt increased six-fold, and families headed by someone age 40 or older represented that largest increase.

How can parents help with rising educational costs and protect their own finances?

The first thing to do is plan ahead if possible. Ideally, you want to be contributing to your retirement accounts and a 529 college-savings plan for your child while they are growing up. 529 plans are investment accounts sponsored by states that are tax-free as long as the money is used for education expenses. You need to apply for financial aid by filling out the FAFSA (Free Application for Federal Student Aid) form, along with any forms required by your child’s college. Students need to pursue scholarship opportunities. Each year, an estimated $46 billion in grants and scholarship money is awarded by the U.S. Department of Education and the nation's colleges and universities. But remember, you should not be taking out loans or cashing out your retirement account to pay for college. Your child can take out loans for college, you cannot take out loans for retirement.

What are the other drivers of parental giving?

A large number of would-be empty-nesters who are not paying for their children’s education find their chicks return home. Oftentimes, this means parents end up shelling out for their grown child’s room and board. Others subsidize rent, insurance or other bills. And while some assistance to get your children on their feet after college may be fine, it is not uncommon for temporary assistance to morph into a pattern that lasts for years.

As parents, what should we keep in mind to protect our future?

There are a few things to consider. First, you do not want to encourage dependency. No parent does it intentionally, but grown children can come to expect it, assuming there is more where that came from. You are not doing your kids a service by sacrificing your finances for them.

Second, do not be afraid to have "The Talk." If you need to focus on your own finances and retirement, share that with your child. Let them know that you were happy to help while you could. And to that point, a little tough love can go a long way.

Finally, remember the safety drill on airplanes: put on your own oxygen mask before helping your children. Remember that your finances are very similar. At the end of the day, you can only be financially helpful to your children if you are in stable financial straits.

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