Money Magazine: What you owe your kids

Source:CNNMoney.com Author:Marlys Harris Date:03/25/14 Click:

At this point in their lives, Tony Carideo, 57, and his wife Linda, 56, of Bloomington, Minn., thought the financial load of raising their four kids would have become considerably lighter. But so far they haven't noticed much extra cash sloshing around in their bank accounts.

Only their eldest child, Max, 26, an engineer, is entirely off the family books. Nick, 24, has a B.A. in psychology but needs an advanced degree to get a job in his field. While he decides whether to go for it, he lives at home rent-free and works at a bike shop.

Greg, 21, is a studio art major in nearby Minneapolis, and the Carideos figure that to help him become financially stable after graduation they may have to provide startup cash for a gallery or studio.

Daughter Olivia, 19, is taking a yearlong $17,000 course to become a hairdresser. That's much less than her parents spent on education for each of her brothers, so the Carideos plan to even things out by paying her rent for a few years after she graduates.

By the time they're done, the couple figure they'll have spent upwards of $250,000 staging their children for liftoff. For all their generosity, the Carideos are not multimillionaires. Their joint income is about $135,000 - he runs an investor relations business, she's a teacher - and they have a retirement fund of $500,000, which may not be enough for them to live comfortably throughout their retirement.

Nevertheless, Tony Carideo is determined to do whatever he can for his kids, even though his parents didn't help him much when he was starting out. "We're living now in very different economic circumstances," he says.

Lots of other parents these days apparently feel the same way. Research shows that moms and dads have been spending quite a bit on their adult kids in recent years. According to a 2004 University of Michigan study, parents provided about $2,200 a year in aid to children ages 18 to 34; upper-income parents gave more than $4,000 annually. Over the past 30 years, there's been a 50% increase in the number of adult children living in their parents' homes - which by itself increased parents' outlays by nearly 20%.

All told, a 2007 survey by Ameriprise Financial found about nine out of 10 parents give money to their grown kids for major expenses: credit-card balances, car insurance, student loans, you name it. Have baby boomers raised a generation of whiners who can't live within their means?

Doubtless, some have. But many parents say their kids work hard (the Carideo boys, for example, each paid half of their college tuition); it's just that the price of independence is so much higher than it used to be. To compete in the job market, you need four years of college and, increasingly, an advanced degree.

But with tuition rising at more than double the rate of inflation, financing that education has become a lot like buying a home - few can do it without borrowing heavily. Research by FinAid, an online guide to scholarships and loans, shows that two-thirds of college graduates leave campus in debt (average amount: $19,000); grad students who borrow typically add another $27,000 to $114,000 to the tab.

Even with their expensive degrees, young people find it harder to get a foothold in the job market; the competition is stiffer partly because of the sheer numbers of the baby boomlet, so many of them college grads. While they look for a position in their field, many newly minted B.A.s and M.A.s take low-paying temporary jobs, often without benefits, that can't cover the high cost of housing in the big cities to which they gravitate. "Parents become the only backstops for a lot of necessities," says University of Houston professor Steven Mintz, author of Huck's Raft: A History of American Childhood.

But there's another factor at play: Young adults, like many of their parents, have developed a strong appetite for consumer goods and a "gotta have it now" mentality. Prime example: a house. "Parents scrimped for years to get a 20% down payment together," says Ozgur Karaosmanoglu, senior vice president for investments at Raymond James in Washington, D.C. "Their kids are in a hurry. They want a house by the time they are in their late twenties."

And boomer parents are eager to help, says Mintz. "They had fewer children than previous generations and have bigger household incomes, so they believe they can afford the extras."

Maybe. But don't kid yourself. In 10, 15 or 20 years you'll be facing retirement, and few among us can say that we've saved enough. If you were to invest the $2,200 a year that the average parent gives to a child and earn 8% annually over 20 years, you'd add $78,000 to your portfolio - money you might desperately need one day. Meanwhile, your openhandedness could be hurting, not helping, your kids by keeping them everlastingly immature and ill-equipped to deal with financial challenges or setbacks on their own.

In the end, whether and how much you help your adult children is a personal choice that flows out of your affections and fears for them. Following are some guidelines for deciding when giving makes sense, whether you can afford to let the money go and what the consequences might be. Ignore them and who knows? Your kid could still be coming to you for his weekly allowance when he's 46.

Assess their true need

Once your kids are adults, they are supposed to take care of themselves. So before writing a check, ask yourself whether the expenditure is worthwhile. That, of course, is a judgment call that may draw you into bitter squabbles about each request.

So here is a useful acid test from Eileen Gallo, a psychotherapist who, with her husband Jon, a trust and estate lawyer, co-authored Silver Spoon Kids: How Successful Parents Raise Responsible Children: Consider, she says, "whether giving your kids money will speed them toward independence or prolong dependency."

That criterion makes sense. New plasma TV? Not likely to encourage anything but your kid becoming a couch potato. A vacation in Barbados? Better you should go. A course to enhance computer skills? Yes, if it helps your child get a better job. A second master's degree? Depends. "Your child may just be delaying adulthood," says Jon.

The same standard should apply if your child says she needs to move back home. That you can provide TiVo and clean sheets is not a good reason for your daughter to retreat to her bastion of Beanie Babies. But if she's lost her job, flunked out of college or fallen ill, a few months to regroup at home may get her back on her feet - if this isn't the fourth time you've provided such help.

Not every decision is so neat and clean. Say your son's car collapses and dies on the freeway. Without it he has a two-hour trip by bus to his job, and his boss does not tolerate late arrivals. Before you rush to the nearest car dealership, find out what your son has done to solve the problem. Has he asked co-workers about car pools? Or priced out an old clunker that would serve as a stopgap until he saves up for new wheels? Has he tried the bus? How much you help should correspond to the efforts he's made on his own behalf.

You may want to offer assistance simply to reassure yourself. Say your daughter loses her health insurance or can't get any from her current employer. (About 42% of the uninsured are between age 18 and 24.) As a matter of self-preservation, you may want to contribute toward a high-deductible policy for her. If she develops a serious illness, you and your spouse will likely be the ones to pay the bills. With insurance at least you limit your damage.

Remember who's first

You've heard it on every airplane you've ever flown. "Place the oxygen mask over your own face before assisting children." The rationale: If you pass out, you won't be able to help your kids. That same principle should govern any proffer of goodies to grown children, says Michael Eisenberg, a Los Angeles C.P.A. and lawyer. If you're overly generous, you'll have to do without that new kitchen, the trip to Peru you'd planned or a longed-for tummy tuck. Worse, you could wind up without enough money for your retirement.

If you have more than enough income to pay your bills and fund your retirement accounts, you may decide that helping your kids is more important than the items on your bucket list. But at some point you will have to retire and live on what you've saved. So heed this cardinal rule: Never tap your 401(k) to help your kids.

First, you would have to pay a 10% penalty if you hadn't reached age 59½ at the time of withdrawal, and you'd owe ordinary income taxes on the money. Moreover, the long-term negative impact on your savings can be dramatic. "Parents often call us and say let's take $100,000 out of our portfolio and give it to the kids for a down payment on a house," says Karen Fries, a financial planner with the Family Firm in Bethesda, Md.

But consider the impact: If you have $750,000 socked away and add $10,000 a year for the next 10 years, you'll have $1.8 million for retirement, assuming an 8% annual return. Remove $100,000 at the outset and you'll have only $1.6 million. Says Fries: "After we run the calculations, people see how much money they'll be missing, and they say, 'Uh, maybe not.' "

Most parents surveyed by Ameriprise say they use disposable income or funds from ordinary savings accounts to pay their kids' bills. And 70% believe that providing such help has no effect on their retirement stash. But if you think about it, that's not really possible. Tapping current income diminishes the amount you can save for retirement, not to mention the earnings it accrues over the years.

People often delude themselves into believing they have enough, but, says Karaosmanoglu, "they don't realize how long they're going to live." If your savings are lagging behind where they should be, you'll have to ration the amount you give your kids. If you don't, you may have to ask them for help later on.

Have a vision thing

Most parents who lend a hand to grown kids do so ad hoc, dispensing funds as needs and requests arise. But to the extent that you can, you should think through your philosophy of giving ahead of time. Your decisions will then reflect your values about money, raising kids and how you foster responsibility and independence. Plus, your children will not feel your answers are capricious; you will be able to explain why you've decided to help or not.

Some parents, for example, believe it's important for their kids to work for everything they get - hey, nothing wrong with encouraging Junior to sock away money for college starting with his first lemonade stand. How else will the little darling learn the value of a buck? At the other extreme are parents who feel it's their responsibility to give their kids a leg up on everything - say, paying for all of college and grad school; subsidizing rent and paying the car insurance.

Then there are issues of equity to consider. "Don't think that your kids aren't noticing who gets what," says Eileen Gallo. "But nowhere is it written that you have to play even-steven." Fairness, not equality, should be your mantra. If you help your son the teacher with a down payment on a house, you need not do the same for your daughter the hedge fund manager.

What is most important to Tyra Lancaster, 58, a retired Pittsburgh school teacher, is to ensure that her son Matt, 26, "walks out of college debt-free." She has seen other young college graduates secure well-paying jobs but still struggle to handle living expenses under the heavy load of student-loan repayments. And she doesn't want that to happen to him.

Matt's dad (the Lancasters are divorced) paid for his undergraduate education, but the boy was on his own for grad school. So Lancaster cashed in about $30,000 worth of bonds she had put away for retirement to help pay his way at Carnegie Mellon, where he is getting his master's degree in public policy. "Maybe in 20 years I'll regret it, though I probably won't remember," says Lancaster. "Right now I'm not worried about having enough."

If you believe it's important for your children to pull their weight but don't want them to shoulder every expense, share the burden. You'll provide tuition; make them pay room and board. You'll pay for their undergraduate education; they're on the hook for any additional training after that.

Or consider matching funds, which can work in any number of situations. Your daughter needs a new car? "Tell her that you will match whatever amount she raises in five months," says Victoria Collins, a Los Angeles financial planner and psychologist. Your son and daughter-in-law need a down payment for a house? You'll match what they can put together in 24 months. "You'll be surprised how fast they'll save," Collins adds.

Commercial real estate broker Victor Frankel, 63, and his wife Robyn, 58, who runs a public relations practice in Clayton, Mo., used this approach when it came to paying for college. With the help of Robyn's parents, the couple had saved $70,000 for each of their two sons, Arik, 25, and Aron 22, but let the boys know that this was the limit of the assistance and they had to do their part.

So the boys shopped for the best college values and sought out and won partial scholarships - Arik to Indiana University and Aron to Drake in Des Moines. Both Frankel kids graduated debt-free, and Arik had enough left over in his college fund to finance his first semester in the M.B.A. program at Washington University. He took out $60,000 in student loans to pay the rest.

Let there be strings

Make the terms of your financial assistance clear: how much you are willing to give, for what purpose and what, if anything, you expect in return. That way you minimize the chances of whining...that is, misunderstandings ("You paid off my credit card last time; how was I supposed to know you wouldn't do it again?"). And you send your child the message that you expect her to stand on her own feet eventually. Yes, Mom and Dad, you really do have to let go at some point.

Laying down rules is especially crucial when a grown child returns home to live with you again. The Gallos suggest the following: The child must have a job or get one; he must assume regular household chores; and the stay can only last for a specified period, such as six months or a year.

Finally, you might want to charge rent, even a nominal amount. Not thrilled about asking your son to pay to stay in his old bedroom? Collect the money but keep it in a savings account that you refund - as a surprise - when he moves out.

If your kid can't comply with your terms, he'll have to take a hike. It's okay to attach a few strings to your help. Example: "Sure, I'll pay half your rent, as long as your boyfriend doesn't move in." Admittedly, this kind of quid pro quo can get pretty intrusive, but hey, it's your money and you have the final say over how it's used. If your child doesn't like it, she can do without the dough.

Be straightforward about your expectations - your kid isn't a mind reader. If you promise $300 a month to supplement your daughter's rent because you want her to live in a secure building in a good neighborhood, let her know the deal's off if she instead uses the money to buy a pair of $800 Marc Jacobs pumps.

Similarly, if you contribute half the down payment for your son and daughter-in-law's new house, you should let them know explicitly if you expect them to buy a place within driving distance, not four hours away. Otherwise, your next family get-together will look like a meeting between the Capulets and the Montagues.

Map an escape route

Some parents joke that they will have to sell their house and move to a one-bedroom condo to get rid of their live-in adult child. But there's no need to go to such lengths to extricate yourself from financial entanglements. If you're providing a one-time gift, such as $5,000 to replace a car engine, draw a line under it. State the terms clearly: "After this I'm not going to help you with car expenses. And you'd better buy a more reliable car next time." Or you might say, "Consider this your birthday, Christmas and Halloween present for the next year."

If you're providing ongoing aid - helping with health insurance or rent, for example - you can give your child a deadline. It can be a certain date, but it should make sense - "In three months, when you finish your job training" or "In a year, when you should have your first raise." Giving money in the form of a loan can also provide you with an end date. (And you'll get the money back - uh, probably.) Just be sure your child understands that you really expect him to repay, says Karaosmanoglu. If he doesn't, you'll be tense every time he and his wife buy some luxury tchotchke.

One new service that can help you structure a loan is Virgin Money. For a fee that starts at $99 plus $9 a payment, the company will provide the paperwork to engineer a loan with a relative and service the account. It will even dun your kid if he doesn't pay up or restructure the loan. Playing Lord and Lady Bountiful with your kids can be rewarding - unless they are ungrateful and blow the money on Internet poker. Of course, if they do mess up, well, you can fix them all in your will.

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