How to Keep Boomerang Kids From Ruining Your Retirement
A college degree can be a career launching pad for many young adults, but the debt associated with earning that degree can send them out of the dorms and back home to mom and sad after graduation. According to a 2017 TD Ameritrade Young Money survey, two-thirds of teens said they had no plans to move back home after college, but 48 percent of post-college young millennials end up doing just that.
Known as boomerang kids, these young adults who return home can have unintended financial consequences for parents, particularly those who may be nearing the run-up to retirement. When household expenses for things like electricity or groceries increase because there's an extra person living at home in need of financial assistance, that can put a strain on the ability to save for retirement. Understanding the full impact of the increased expenses and setting boundaries is important for parents to keep boomerang kids from sidetracking their later years.
When boomerang kids enter the financial equation, parents should review their budgets to see what else they can scale back on so they can continue funneling money into their retirement accounts at the same pace.
Breaking Down the Costs
The important thing to understand about taking care of boomerang kids is that expenses go beyond what is spent while they are living at home. Interest that could have been earned on the money spent on boomerang kids is the biggest loss. Consider a conservative example of a recent college graduate between the age of 22 and 25 who returns home for a year while starting a new job while trying to save up enough money to move out on his own. The parents agree to let their child live at home for 12 months rent-free, and they also agree to provide groceries and pay for his car insurance. There likely would be other added expenses, but focusing only on these two key expenses is enough to get an idea of how much boomerang kids can impact retirement savings.
- Groceries: According to the U.S. Department of Agriculture, a man between the ages of 20-25 in a three-person family spending a moderate amount on groceries would add about $315 per month to those costs. Calculate this over 12 months, and the cost is $3,780.
- Car insurance: Car insurance rates can vary widely depending on location and other circumstances, but a driver younger than 25 can conservatively expect to pay at least about $100 per month, according to DMV.org. Calculated over 12 months, the cost is $1,200.
Just looking at these two costs, one child moving back home for one year would cost approximately $4,980. If the parents are about 50 years old, it's reasonable to calculate how much interest that money could have earned in a retirement account over a 20-year period. With those parameters, the money would more than triple to nearly $16,000 if earning a modest 6 percent return in a retirement account.
If an adult child remains at home for three years, the actual costs would triple to about $9,960, which could grow to more than $31,000 if given 20 years at 6 percent interest. That child living at home for five years will cost about $24,900, which would grow to more than $61,000 if given 15 years at 6 percent interest.
On the surface, roughly $5,000 for an adult child to move home for a year might not seem like too much, but if that year turns into three years or five years, the added expenses could reduce retirement savings by 10s of thousands of dollars.
Drawing a Financial Line in the Sand
Parents may want to give their children whatever they need, but that shouldn't come at the cost of shortchanging their retirement. Parents who find themselves with boomerang kids should be clear about what kind of help they're willing to extend financially.
For example, should adult children be charged rent or contribute to the household budget for things like utilities or groceries? Or, will they be expected to contribute in nonfinancial ways, such as running errands or lending a hand with chores?
The way in which parents handle boomerang kids financially depends largely on whether or not their kids are working. A new grad just entering the job market with no income may need assistance with their own bills and the costs associated with job searching. Parents must decide how much they are willing to give and how much they reasonably can afford without infringing on their own retirement savings. Parents who already are retired need to decide how much they can afford to divert out of their budget to help with their children's expenses.
Discussions about setting limits for financial assistance should take place as soon as possible and be as specific as possible. When clear expectations are established at the beginning of such an arrangement, potential conflicts become less likely.
Boomerang kids can easily drain retirement funds if financial assistance is offered with no end in sight. When discussing limits on the amount of financial assistance to provide, it's also important to set time limits. For example, parents might agree to help boomerang kids who are looking for a job they're looking until they've gotten their first paycheck.
For boomerang kids who already working, different limits can be established. Parents in that situation might agree to help with bills or not charge rent for a set period of time until their children can save enough money to get a place of their own. Stipulations will vary depending on circumstances, but it's helpful to be as specific as possible and make sure you're giving them a timeline to work with.
Drawing Up a Contract
Writing a detailed rental agreement or contract might seem a little extreme, but it reinforces the idea that parents are not an endless piggy bank and it can help prepare young adults for what they'll face when they sign their own lease eventually. When terms are agreed upon, it eliminates any room for confusion about who is responsible for what. It also can help to create some accountability for boomerang kids so they're motivated to hold up their end of the bargain.
Even if putting everything in writing, it's still important to leave room for flexibility. For instance, terms might need to change if a child loses a job unexpectedly. Or, in the case of older boomerang kids who may be returning home after a divorce or the loss of a spouse, more time might be needed for them to get their finances on track.
But, remember to keep your retirement in sight at all times. If you're considering gifting an adult child money for a down payment on a home to get them out of your house, for example, ask yourself where that money's going to come from. Do you have enough in liquid savings or would you have to pull the money out of your retirement account? Tapping an IRA could help you get boomerang kids out of the nest for good but what does that mean for you tax-wise, and for your overall retirement strategy?