Closing 'the bank of mom and dad'

Help your adult children gain financial independence, so you can stay on track for your own retirement

08 Feb 2019

Key takeaways

  • Openly communicate with your children about your retirement goals and set boundaries for financial support.
  • When gifting to your children, discuss generational differences in values and instill good financial habits.
  • Take care of your finances first before supporting others.

Even if you're a diligent planner and investor, it's more challenging than you might think to enjoy retirement as you've always envisioned. Market volatility and unexpected needs are two variables that can impact the long-term health of your retirement savings—but what if you're also helping out your kids financially?

One study found that "74 percent [of parents] have helped their adult children pay living expenses or debts."1 While it's understandable for you to want to show parental support, this sort of financial enabling could have a dramatic impact on your quality of life during retirement.

If you're looking to reduce the burden of financially supporting your adult children, here's where you can start.

Have open communication

Having a frank discussion about money with your children may feel uncomfortable, but it's essential, stresses Justin Waring, Investment Strategist Americas for UBS. Make your children feel as if they are part of the discussion by explaining to them your future goals and lifestyle needs as you head into retirement.

Each family is different, and it's important to decide how much you're willing to share with your kids. For example, some parents want to let their kids know about how much inheritance to expect, so that they know that there's a safety net for their own retirement planning. Other families prefer to hide this information to avoid "spoiling" their children, but sometimes secrecy can be just as damaging. Rather than a lump-sum bequest when you pass away, consider distributing gifts in smaller installments, supplementing your childrens' income.

Work on setting boundaries

There are ways to adjust or reduce the levels of financial support you're currently offering your children. Ainsley Carbone, Total Wealth Strategist for UBS, suggests parents should talk about their plan to reduce support with their children before they start. And when it comes to removing financial support entirely, Carbone advises parents to "pull back gradually with markers along the way." This approach—versus cutting off funds abruptly—can help smooth the path and give your children time to adjust their own financial plans.

Understand generational differences

When it comes to gifting something of value to your children, you might already have a few ideas in mind. However, it's essential to recognize what might be precious to you could not be as meaningful to them. Indeed, the 4Q 2017 UBS Investor Watch: For love not money found that while nearly all surveyed heirs to a collection felt honored to receive it, only one in three inheritors were interested in the collection and happily kept it, and a quarter of inheritors sold or intend to sell the collection.

"Parents should be aware of generational values," says Waring. "They may have an art collection that's so important that they're willing to adjust their lifestyle to maintain it; but that might be the first thing their children will want to sell."

To address different preferences, discuss them with your children—you might discover that one child would happily hold onto the art collection, while another would prefer a share of the investment portfolio.

Instill financial literacy

It's never too early to instill good financial habits in your younger children. Waring notes that gifting shares of stock to your young children can help teach them about the power of compounding growth, a powerful lesson that can help them make their own financial decisions in the future.

For older or adult children, consider involving them in some family financial decisions. "A 'Family LLC' can be a great tool for education. This is an investment account where everyone helps manage investment options, and makes decisions about how to use the funds for things like annual family vacations," notes Waring.

Prioritize your financial security

As you approach retirement, you have fewer and fewer years of salary with which to contribute to your investments. By contrast, your children still have decades of earnings potential before them. Therefore, it's key to take care of your finances first before you can support others.

"You're in a much riskier position," Carbone explains. "If your financial security is in doubt, then the situation will be worse for everyone – it's far more difficult for you to recover from financial setbacks than it is for your adult children who will have years of earnings potential to rely on."

Let your kids know that your retirement is a primary focus and how over spending could have an impact on your future. Of course, it's hard to say no to your children, but your financial security must be of top concern as you head into retirement.