When is it time to close our wallets, tie up the purse strings and let our grown children make it on their own? A lot of us help out the first year or two after college--as our kids wrestle with career choices, entry level jobs and paying off college debt.
But it can go on longer than that: 40 percent of adult millennials in the U.S. currently get financial help from us, their parents, according to a Bank of America/USA Today survey. Across the pond, a survey finds that a large cohort of parents in Britain are supporting their grown children even as those children pass the 30-year-old mark. A quarter of the "grown children" in the survey said they did not feel financially stable by the age of 35 and still need the assurance of their parent's financial help.
It's not necessarily support via free rent at home. Nine out of ten of grown children in the British survey who were older than 35 said they live away from home. By comparison, a recent survey of young adults (18 to 30) in Europe found that half of them reported living with their parents.
What's behind the late launch into financial independence? Among the reasons that the Brits put out there: low wages, high rental costs, zero-hour contracts, university fees, rising living costs, an unwillingness to take on responsibility, a generational lack of ambition, or plain old inertia.
Despite the delays in setting off on their own, the British study had bright spots. Once they were launched, 70 percent of the 35+ year-olds said they felt indebted to their parents for their financial support over the years. And here's the really heartening stuff: 60 per cent said they sometimes picked up the tab at restaurants and outings. A quarter have paid for a holiday for their parents, helped their parents with rent or bought them clothes when money was tight.
Thinking big this holiday season? Here's a really huge one: Gift your grown child the down payment on a house.
Too big a dent in your retirement reserves? You could loan them the money (toward a mortgage) at rates advantageous to you but better than they'd get at the bank. Or you could co-sign the mortgage so that they qualify for a loan where they might not otherwise.
Here are some key points to take into account on each option (with thanks to a NYTimes article):
Gifting money for a down payment: Some of us consider this a "here's your inheritance in advance" gift. If it's a recent gift, though, the borrowers--your kids--must prove the origin of the funds and provide a letter affirming that the money is a gift and does not need to be repaid.
Lending money: With current interest rates on CDs just over 1% and mortgage rates around 4%, you can loan your kids money at a lower rate than the bank and still earn more than a super-safe CD. It's a win-win, as they say, except that it isn't always comfortable to be the banker collecting a debt payment. Three initials of warning: IRS. A family loan needs to be at arm's length, meaning it follows the IRS's proscribed interest rates based on the terms of the loan.
Co-signing the mortgage: If your grown child isn't earning enough to qualify for a mortgage, your co-signature could bump them up into qualified. Some parents exercise this option so they can sleep better at night: It helps their kids live in a more stable or safer neighborhood than they might otherwise be able to afford. Co-signing may not cost the parent cash but it does figure on the debit side of their credit rating and could complicate refinancing or buying another home in the future. To say nothing of the drain on parental funds if grown child misses some mortgage payments.
The debate goes on: when it comes to money and time, should we offer a helping hand or impose tough love on our adult children? Of course, we all want our children to be independent adults who are able to make mature decisions about their lives. But does one approach best the other?
Posts and comments on this blog have explored the issue (most recently here and here) --some of us gratified by the pleasure it gives us to help our children (either monetarily by, say, helping with the down payment on a house, or time-wise by, say, babysitting the grandkids so both parents can work); others feel good about their hands-off approach and the way their kids have struggled but eventually overcome their financial or time issues.
A recent article by Dr. Cecilia M. Ford takes a slightly different tack. Noting that "the further a family is from their immigrant roots, the more likely they are to be steeped in the ideal that we must make it on our own, and as soon as possible, live apart from our parents," she raises questions about whether separation and financial independence are sign posts of maturity or rather a cultural signifier of the past half-century.
Here are some of her points:
History suggests inter-dependence. Cultures have always promoted inter-generational support--except in recent times. French economist Thomas Picketty's 2014 book Capital in the 21st Century points out that in the latter half of the 20th century, in which the middle class flourished and many of us were able to achieve economic success, was the anomaly and not the rule. For most of human history, wealth has been controlled by the 1% (or less) and the current swing back in that direction is more of a return to business as usual. Given that perspective, helping out our kids financially or with our time is not "a crazy new idea but returning to age-old customs."
The culture is shifting. We are in the midst of a cultural norm-shifting moment toward greater interfamilial connectedness. Our kids are working more hours than ever before and need us to be around more than we needed our parents. "People on the lower socioeconomic rungs of the ladder accept this out of need. Many children are raised with the help of extended family and resources are shared because they have to be. More and more of the rest of the population may be faced with similar needs."
To each his own home may no longer work.We may have to change the way we see ourselves in relation to others. "In the United States, the giving or receiving of help (“free stuff”) has a particularly bad reputation. There are times when it’s OK to get it, (when you inherit, for example) and times when it’s very much not OK. The norm that we have lived with, in middle-class America is that the ideal is for each family unit to have its own dwelling."
To help or not to help is a personal. While independence is a fine ideal, there is a thin line between independence and isolation. Parents need to judge when their help is useful and necessary versus a potential “crutch” that may lead to an unhealthy dependence.
We are the helping-hand generation. All the surveys say so. Even when our kids are adults, we are ready--if we can afford it--to lend them money or gift them cash, especially for what we consider the Big Things. Chief among those biggies: buying a house. A survey this past spring reports that three out of four of our grown kids who recently bought their first home needed our help to afford the down payment, closing costs or other expenses.
For some of us, it's a guilty (should we be helping them out, still?) pleasure (we get to visit them in their nice home) that pays off. Yes, we might have struggled to do it on our own when we were young, but a whole lot of things have happened since then--including wild inflation in the cost of housing and a shakier economic foundation in the work place. Besides, many of us get a healthy return on our investments. Not necessarily in legal tender but in seeing our kids--and grandkids-- living in a solid house in a stable neighborhood.
Sometimes, though, that investment can run into trouble.If our children are married, there can be a divorce; if our child's spouse gets the house, where does that leave our gift? Or, if our child refinances and takes out $50,000 to pay for a five-star vacation or $100,000 for a BMW sports car, where does that leave our investment?
Some of those issues were addressed in a recent NYT story that warned of cautions to take when we help grown children with the purchase of a house.
Here are two key points from financial planners and mortgage experts:
--The divorce contingency: If the gift or loan is specified in writing as being a gift/loan only to one's child (and not the couple), in case of a divorce, the gift should not be considered mutual property available for division. Your kid's spouse may get the house, but the gift has to be repaid. If it's a loan, a repayment plan should be in place and both divorcing partners should be obligated by it--regardless of who is living in the house.
--The refinancing issue: If parents think their child may have over-spending issues--or that the spouse might--they can take the control-freak route. As terms of the gift or loan, they can require that their name by added to the title at closing. That gives them the right to be notified if there is an application to refinance as well as the right to approve or disapprove the refinancing--though not necessarily how their kids use that money.
The trend line in the U.S. is in one direction: Most of those of us who can afford it, like to help our grown kids financially--even as society takes a dim view of it. It's the same in Australia, where the name for financial help flowing from parents to grown kids is Sponge Society. But there's a very different attitude in South Korea. Here are findings from surveys in those countries that inform my point.
In Australia, a recent survey found that 86 per cent of the parents of grown children provide financial help to their adult children. Loans and cash head the list, but rent, credit card bills, vacations, major appliances and down payments on a house are also part of the assistance roster.
Meanwhile, 40 percent of the adult children surveyed admitted to receiving financial support from their parents. One in five of them said they were embarrassed to be getting help from mom and dad.
The need for a financial boost from the Bank of Mom and Dad--it seems endless. They may be twenty somethings not yet able to establish an independent-life beachhead, thirty somethings buying their first home, forty-ish kids with unexpected and uncovered medical bills. Do we help? If we can afford it and we're asked, do we loan or gift them money for something we consider important or approve of?
Study after survey tells us that more and more of us continue to help out our grown children. A July 2014 survey by American Consumer Credit Counseling, a Boston nonprofit, found that one in three U.S. households assist adult children financially, compared with one in five supporting elderly parents.
A November 2014 survey by Bank of America reported that more than a third of adult millennials receive regular financial support from their parents, and one in five still live at home rent- or expense-free. The support goes not just to those struggling to get started. The poll, which had 1,000 respondents ages 18 to 34, found that among those earning more than $75,000 a year, 25 percent were getting help from their parents to pay for some groceries and 21 percent for clothing.
We also dole out cash to cover rent, cell phones, cars and vacations. Some of us invade our retirement accounts to pay for a child's wedding or down payment for a home. One financial adviser reports that cash supplements run the gamut from regular allowances (to those not earning enough to cover rent and food), to help with legal bills if a child is going through a divorce, to occasional payments for a coat or plane ticket.
One concern, of course, is what it's doing to the money we'll have available when we retire or, if we're retired, whether it will deplete our nest egg while we're still tottering around in our old age. Unless we're expecting our kids to take care of us --most of us do not have that on our Wish List!--we need the wherewithal to pay our bills as we age into our 80s and 90s.
Then there's the question of what this continual support is doing to our children's ability to reach financial independence. An indulgence here and there is one thing--it's one of the pleasures of having a little extra money in the bank and does no harm to the receiver. But barring unusual circumstances, covering their rent, paying their credit card bills, picking up the tab for their cell phone may send the message that mom and dad will pay for a life style they can't afford on their own. In which case, there's no way they'll be ready, willing or able to help us out (sound that Beatle's beat) when we're 94.
When our kids are 20-somethings, they may need a little financial assist. A good job may not materialize right after graduation; school loans may be a drag on an entry level salary; we might prefer to pony up for part of their rent than have them live in an unsafe, low-rent neighborhood.
But when they get to their 30s or 40s, the calculus changes. They ought to be on their feet and independent. And yet, parents of 30, 40 and even 50-year-olds still feel the pull: We want to help out. A need is a need: Who's to judge? A 40-year-old child may have lost a job, be going through a divorce or have extraordinary education costs for the kids--your Grands.
The problem for those of us who are retired--and if our kids are in their 40s, we may well be--is that we're no longer bringing in the big bucks. Pensions and social security aside, the earnings from savings are a big chunk of our income. What if we live to be 100? If we give too much away, we could be without adequate means.
That said, if we can afford to help out, why shouldn't we? Here's one reason: Fairness to the other kids. Whatever savings we don't use up in this lifetime are part of the corpus we leave our children--all of them and presumably equally. And that's the hitch. We're giving more to the child in need by giving money up front--at the expense of the other children, all of whom split what's left.
There is a way around this, according to B. Kelly Graves, a financial adviser. Writing in the Wall Street Journal, Graves suggests making the financial assistance to the child in need a loan that's due in, say, 30 years, or when the second parent dies. "Even though it’s a loan," Graves writes, "the chances are the client [that's you or your spouse] is never going to see that money again." But now the financial aid is, in effect, an advance on the child’s inheritance and the loan is repaid to the parents’ estate from the child’s inheritance. So the assistance is not a handout, the estate is made whole [at least on paper] and the split becomes equal among the heirs.
Now all that's left is too have the conversation with everyone that explains the strategy. Good luck with that.
A friend's son has gotten into the grad school program of his choice. He's not only heading for Budapest to study international economics, he's been offered an 80 percent discount on tuition. He's asked his parents to pay for that remaining 20 percent. They've said no. "We can't afford it right now," says my friend, who told her son to borrow the money. "He doesn't want to," she adds. "He's really scared about going into debt."
He may have to borrow but who can blame him about wanting to avoid student loans. A recent Pew Research Center report finds student debt burdens "weighing on the economic fortunes of younger Americans, as households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation."
Here are some stats that my friend might not want her son to dwell on: Four out of every ten U.S. households headed by an adult younger than 40 currently have some student debt—the highest share on record, with the median outstanding student debt load standing at about $13,000. The median loan is equal to about two years’ worth of household income.
Meanwhile, households headed by a young, college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700).
Then there's a new report from the Brookings Institution with some variations on the same theme: between 1989 and 2010, the share of households with student loans jumped from 9 to 19 percent, and inflation-adjusted median student debt rose by more than 50 percent. Put in another perspective, by the end of 2009, student debt eclipsed credit card debt as the second-largest type of debt owed by American households, after mortgages.
As to my friend and her son, she hasn't told him yet, but she and his father plan to help him out with repayments when that part of the loan contract clicks in. He's on his own in paying for grad school, but not completely.
A friend, whose children are nearing the 30-years-old mark, writes:
"I just had an interesting conversation with a smart guy who was talking about the 'Bank of Dad.' His kids are "self-supporting," in their mid-30s, making (his words) 'in six figures,' and yet come to him for help on a regular basis. For example, they go to Japan a couple of times a year, a trip that necessitates a visit to DaddyBank.