Warning: This oft-forgotten expense could wreck your retirement plan

|
Warning: This oft-forgotten expense could wreck your retirement plan
Image Credit: Dreamstime
Team Clark is adamant that we will never write content influenced by or paid for by an advertiser. To support our work, we do make money from some links to companies and deals on our site. Learn more about our guarantee here.
Advertisement

There’s a rarely discussed danger that threatens to tarnish your golden years: Parents supporting financially unstable adult children!

RELATED: Americans are actually saving more than we thought — but it still may not be enough

Supporting an adult child is no small (or cheap) task

It’s a sad fact of adulthood, but turning 18 or 26 or even 30 doesn’t automatically mean adult children stop needing financial support from their parents.

In fact, nearly 75% of parents say they help their adult children financially with everything from paying down debt to daily living expenses like money for food and cell phone bills.

But at what cost to a parent’s retirement prospects???

By one estimate, supporting adult children could cost parents up to $227,000 in retirement. Could your nest egg withstand that kind of hit?

Of course, that quarter of a million dollars may seem like an unbelievably huge amount of money. Not to mention that it involves a projection of the possible future expenses of supporting an adult child, versus how much you could have if you invested that money.

So here’s a figure that’s a bit easier to get your head around and that has a whole more immediacy: Recent research suggests that parents give college grads an average of $3,000 annually in financial support throughout their 20s.

The $3,000 figure is according to the University of Michigan’s PSID Transition to Adulthood Supplement, which looked at a nationally representative cohort of more than 2,000 young people from 2007 to 2013.

Interestingly, a recent study conducted by The New York Times finds an adult child’s college major — or lack thereof — has a profound effect on how much parental support they need.

And in what may come as a surprise, young people with no degree tend to need less financial support than those with degrees in hot fields like STEM and health care.

Here’s how it breaks down by major:

parental support for adult children

Unfortunately, that’s the not the entire picture when it comes to hidden expenses that could derail your retirement if you have a family.

Particularly for early retirees, there’s another financial obligation they may be facing beyond dependent adult children — that of the financial obligations that go along with having aging parents.

So some early retirees may find their wallets getting hit on two fronts by both the young and the old in their lives. It’s a phenomena that’s aptly called being a part of the “sandwich generation.”

These numbers are eye-opening

It may be unrealistic to expect that you won’t have to at least partly help out your adult children and maybe even your aging parents, too.

But let’s run some numbers to see what your financial picture could look like if you at least dialed down that support to your children.

Here are the conditions: Instead of $3,000 of annual support for adult children, let’s say you only did $2,000 and then took that extra $1,000 and invested it in a low-cost index fund assuming an 8% annual growth rate.

What would your future financial picture look like if you did that for five years? For 10 years? Or maybe even 15 years?

Years to grow Amount
5 $7,805.26
10 $17,804.41
15 $32,496.45

Your money would more than double by the time you hit 15 years!

Again, to recap, that’s assuming you only helped your 18-year-old with $2,000 instead of the average of $3,000 through age 33.

You can run your own calculations specific to your family situation using the compounding calculator at MoneyChimp.com.

But the message is clear: If you can dial down the financial support for your adult children at all, it’s well worth it!

Here’s another possible solution to the retired parent dilemma

Perhaps you’re in the boat where there’s no possible way you can stop supporting your adult children or aging parents. There’s still a smart financial decision you could make, too.

If you anticipate your resources might be drained too heavily by family ties in retirement, you might consider a unique insurance policy that money expert Clark Howard has talked about in the past: Longevity insurance.

Longevity insurance is an insurance product you don’t often hear about from insurance agents because the commissions on the sale of these policies are too small for them to get excited about.

But longevity insurance can be exciting for you as the beneficiary of the policy. You typically buy the policy in increments of $100,000 and it pays you a lifetime monthly benefit once you hit age 85.

If you don’t live to age 85, the policy won’t pay out, so be sure to consider the longevity of people in your family carefully before you explore buying longevity insurance! If you have a family history of people dying before 85, it probably wouldn’t make sense for your situation.

But, if you are blessed with longevity in your family, longevity insurance would allow you to tap heavily in your retirement savings in the name of helping family through age 84. Once you hit 85, you start getting a check every month for the rest of your life.

It’s one possible way to deal with the fact that you may face a budget crunch because you’re supporting financially unstable children during your retirement.

More Investing & Retirement stories you might like from Clark.com:

Advertisement
Author placeholder image About the author:
Members of our editorial team contribute to content published by "Clark Howard Staff." To keep up with our latest news, follow us on Facebook and Twitter.
View More Articles
  • Show Comments Hide Comments