The trend of parents supporting their adult children financially, often dubbed the “Bank of Mom and Dad”, is a growing concern among financial experts. This practice can potentially disrupt retirement planning strategies, leaving parents with limited funds for their own needs in later years. This article will delve into various aspects of this matter, including reasons behind this trend, its impact on parents’ retirement plans, and how to mitigate potential risks.
1. The Bank Of Mom And Dad: An Overview
The “Bank of Mom and Dad” isn’t a traditional financial institution, but a metaphor for parental financial support to adult children. This support often takes the form of assisting with housing costs, funding higher education, or helping meet regular living expenses.
2. Why Do Parents Become The Bank?
i. High Living and Education Costs
The rising costs of housing and education are among the primary reasons parents are financially supporting their adult children. In many cities, home and rental prices have skyrocketed, making it challenging for young adults to afford housing. Similarly, tuition fees for higher education have also increased significantly over the years. Consequently, many young adults rely on their parents to navigate these financial hurdles.
ii. The Desire to Help Out of Love
For many parents, providing financial assistance to their children isn’t just a response to rising costs; it’s an act of love and care. Parents often feel an emotional obligation to help their children succeed, even if it means dipping into their retirement savings.
3. The Impact on Retirement Planning
i. Reduced Retirement Savings
Parental financial support for adult children often comes at the cost of personal retirement savings. Many parents find themselves drawing from their retirement funds to help their children, thereby reducing the amount they have saved for their golden years.
ii. Increased Financial Dependency in Old Age
By depleting their retirement savings, parents may end up being financially dependent on their children in their old age. This situation can lead to increased financial stress and potential conflict within the family.
4. Current Retirement Savings Situation
Most near-retirees have an average savings of merely $15,000, reflecting the systemic failure of our retirement savings system. When coupled with the rising costs of tuition and housing for their children, this creates a dangerous combination, threatening their financial stability.
5. The Risks of Draining Retirement Accounts
With the rise of individual retirement accounts, it has become easy for parents to withdraw funds to support their adult children. However, these withdrawals often come with penalties and can significantly decrease the retirement savings over time.
6. The Consequences of High Housing Costs
High housing costs are not the fault of those who can’t afford to buy a house. Since 2000, home and rent prices have increased by an average of 67%, while the income of millennials has increased only 31%. This disparity makes it increasingly challenging for young adults to afford housing without parental assistance.
7. The True Cost of Helping Adult Children
According to a study by Nerd Wallet, a personal finance website, parents could potentially have $227,000 more in their retirement savings if they chose to save the money otherwise used for their child’s living expenses and tuition. This study emphasizes the significant financial impact of supporting adult children on parents’ retirement planning strategies.
8. The “Avocado Toast” Argument
There has been criticism targeted at millennials for their spending habits, with some arguing that they prioritize short-term luxuries over long-term investments like home ownership. However, this argument is largely dismissed by financial experts who point to the increasing costs of housing and education as the primary barriers to home ownership and financial independence for millennials.
9. Mitigating The Risks
While it is natural for parents to want to support their children, it is crucial to balance this desire with the need for sound retirement planning. Parents can explore various strategies to mitigate the risks associated with financially supporting adult children. These strategies could include setting clear boundaries for financial support, encouraging financial independence in children from an early age, and ensuring that retirement savings are adequately funded before offering financial assistance.
10. Conclusion
The Bank of Mom & Dad can be a lifeline for young adults struggling with high housing and education costs. However, the potential impacts on parents’ retirement planning strategies cannot be ignored. By understanding these risks and implementing strategies to mitigate them, parents can strike a balance between supporting their children and securing their own financial future.
In conclusion, while helping adult children financially is an act of love, it should not come at the expense of parents’ financial stability in their retirement years. After all, one of the best ways parents can ensure their children’s long-term wellbeing is by securing their own financial future.
