The Kids Aren't Alright: Failure to Launch Hurts All
Pew research released in May shows 31.2% of 18- to 34-year-olds still live at home with their parents. According to Pew, postponed marriages, a weak job market and the increasing importance of college education are keeping non-college educated young adults from finding work. For advisors with clients impacted by this trend it’s about untangling parent-child relationships and doling out a little tough love.
Patrick Dwyer, private wealth advisor and managing director at Merrill Lynch in Miami, says that since the financial crisis children of clients are finding it hard to land that first job, particularly one that generates enough income to support the lifestyle they grew up with. What’s more, a high-quality education offers no guaranteed relief against the trend pushing kids back into the nest, ultimately exacerbating the problem in the process.
“Sometimes, a year or two down the road, it becomes clear that the ‘help’ hasn’t helped at all,” says Dwyer who manages $2.4 billion. “When kids live at home without rent they can afford a nice car, take nice vacations and buy any clothes they want. They’re living a lifestyle that they actually can’t afford.”
With car payments and other obligations taking up all their income, the adult child cannot afford to add rent to their budget.
“To get them to move out of the house, the parents then have to subsidize their child’s rent,” says Dwyer. Once entwined in a child’s financial life at this level, it is very hard for parents to extract themselves.
Dwyer addresses the issue with clients by explaining how this kind of support may feel like the right thing to do in the moment, but can have a negative impact on their children’s financial and career choices. Rather than letting a child live at home, he suggests parents provide a fixed amount of money to help the child get “launched”—and then remove themselves from the financial situation. Not only does this strategy eliminate an ongoing subsidy, it lets parents see the choices the child will make with money, which can impact future decisions to provide further financial support.
While allowing adult children to live at home saves them money, it results in costs to the parents, says Jennifer Myers, president of SageVest Wealth Management in McLean, Va.
“What if you’re thinking of selling your house to relocate or downsize — are you now stuck, and what are the financial implications?” asks Myers, who manages $140 million.
Myers has a client who delayed selling her house to allow her 38-year-old daughter to move home and get on her feet after losing her job. A year later, the value of the house has decreased and the daughter has not looked for a job, causing much distress to Myers’ client.
“When we look at planning for this client, it has to include two scenarios; one with the daughter remaining financially dependent and the other assuming she regains her financial footing,” says Myers.
Myers advises her clients to make sure expectations are clear. If they do agree to let an adult child move home, are the parents expected to cover expenses for food, gas and other living expenses as well?
“Financial help can create dependency, and wise parenting requires navigating the difference between the two,” she says.
Advisor Thuong Thien, senior financial advisor with Hewins Financial Advisors in Redwood City, Calif., sees the trend of adult children living at home as one aspect of a much larger trend of parents continuing to support adult children even into their 40s. Thien, whose firm has $3 billion under management, has a number of clients with children who live at home or who receive a monthly stipend for rent.
The most emotionally stressful situations involve retired clients that support their children while living off their retirement incomes.
“The stress comes from not knowing whether they can have enough for themselves and their children’s needs, and wondering how long their kids will need their help,” says Thien.
She advises parents to work on decreasing any financial help for children over time to encourage their independence. She also makes sure clients keep in mind that working adults can take out loans to fund education, cars and housing, while loans are not an option for their retirement.