Big Financial Risk for Retirees: Supporting Adult Children Long Term

Risks and Negatives of Supporting Adult Kids with Retirement Funds

Retirement Savings Employee Benefits

Look around your neighborhood and you’ll likely find a number of adults in their early-20s to late-30s still living in their parents’ homes, otherwise known as “Boomerang Kids”. Some families manage to keep it a secret while their adult children bunk in basements or garages, trying to get a foothold on an otherwise promising career market. Others simply try to avoid the embarrassing questions. It seems like the recession hasn't quite stopped having its negative effect on what should be the most advantaged generation in America – Baby Boomers.

When the Kids Move Back Home

According to data from US Census Bureau reports, in 1960 nearly 6.3 million adults between the ages of 18 to 24 lived with their parents. By 2008, that number doubled to 15 million.

There are many reasons why adult children may choose or be forced to move back in with mom and dad. Growing student loan and credit card debt coupled with higher than average cost of living and lack of employment opportunities are a few. Not having access to affordable housing or enough support to live in an area that has good paying jobs are other factors. In some cases, adults have trouble letting go of the security that they feel they can only get at home.

Financial Issues for Retired Parents Supporting Adult Kids

The financial impact of supporting adult children for years is taking its toll in many unexpected ways.  Older people, many of whom are nearing retirement age or already living on fixed incomes, have to shoulder the extra expenses that come with letting adult kids move back in.

Yet, the most insidious impact is felt when an older person must start using retirement savings to bail adult children out of mounting debt. This choice puts their entire future well being at risk.

Retirement Savings are not meant for Supporting Adult Children

When someone works hard all their life to support a growing family, to buy a home, and to put away for retirement needs – this is generally a good thing.

However, retirement savings benefits are not designed to be used for things like paying off the adult children’s vehicles, putting the grandkids into private schools, paying down student loans and credit cards, and managing other debts.

Here’s why retirees are taking a big risk when they agree to let the kids and grandkids move back into the family homestead.

Retirement savings plans are not designed for supporting multiple family members. Instead, they are pre-tax plans that are to be used for retirement living needs, such as the cost of housing, utilities, and ongoing wellness care.

Tapping into retirement savings plans early has serious consequences later on. When a parent has no choice but to borrow or cash out a 401 (k), IRA, or other type of retirement employee benefits, this is a bad idea. From a tax standpoint, much of the earnings are taken up front in the form of income taxes and early cash-out penalties. A retired person cannot make up the differences because their earning potential is often behind them.

Using retirement savings benefits to pay for student loans is poor money management. The amount of interest alone for a past due student loan or a mortgage is much higher than what a retirement plan can justify.

It’s better for adults who find themselves unable to pay their student loans to work with a consolidation company or make income-sensitive payments until they are able to get back on their own two feet.

Moving adult children into a single homestead adds a burden to all family members. Not only are there increased living costs for space and utilities, but older people often find themselves being the live-in babysitters for grandkids while their adult kids work. This adds to their stress level and can make them ill. Adult children would be better off renting or buying a smaller space and then creating a living area for their adult parents when the time comes for them to need caregivers.

The American family has undergone some major changes over the last few years, due to economic pressures. It’s not surprising that seniors are allowing their adult children to move back home, but they need to be smart about it or risk losing the only financial means they have to cover their own retirement needs.

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