Your adult child still lives at home? Financial tips for parents
While many parents either dread or look forward to the day when their kids reach adulthood and leave home, globally more young adults are postponing the move out of their parents’ house and some are even moving back home after finishing tertiary studies. This may present a financial conundrum for parents who are housing adult children, some well into their 30s.
André Wentzel, Solutions Manager at Sanlam Personal Finance says this trend places mounting financial pressure on parents, at a time when they should be boosting their retirement savings.
According to Statistics SA, 32.2% of South African households have more than one generation living under one roof and in the United States more young adults between the ages of 25 and 35 are living with their parents than ever before.
“Ageing parents have their own financial stresses, so providing for their adult children places even further strain on them,” says Wentzel. This rising phenomenon can be attributed to a number of factors such as the high cost of rent in urban areas, rising cost of living, high unemployment rates and slow rise in income for the employed. Moreover, millennials are known to delay marriage, buying property and having children, until much later in their lives.
Boomerang Generation causing a financial dilemma
This movement called the ‘Boomerang Generation’ – a generation of young people (typically 18 – 34-year-olds) that are choosing to move back in with their parents after living on their own for a while – is presenting a new dilemma in terms of financial planning for both the parents and young adults. Some countries have coined the term kippers (Kids In Parents' Pockets Eroding Retirement Savings) to highlight the negative impact that this has on parents’ retirement savings.
Parents find themselves having to look after a child whom they had hoped would be out of their ‘wallet’ by the time they reach 18 or 21.
Parents shouldn’t lose sight of their own priorities
According to Wentzel, it has become common for parents to charge their adult children rent for living in their house. They also expect them to contribute towards household expenditure, which is fair toward both parties. “Don’t assume all the responsibilities when there is another adult earning an income in the house. If they are earning a reasonable salary, charge them market-related prices for rent. Avoid giving them mom-and-dad discount, so that you can save this income towards retirement.”
Apart from charging rent, Wentzel provides more tips for parents to find a balance between funding this living arrangement with their child and saving towards their own financial goals:
Split household expenses and let your child take responsibility for certain recurring costs, e.g. paying for utilities or buying some groceries.
Have regular contact with a financial planner to assist your family in working out the financial structure that works for each individual.
Introduce your child to the benefits of having a financial adviser to encourage them to start taking control of their financial position.
The benefits of using a financial planner to work out an arrangement for both
Sometimes parents may avoid frank financial conversations with their adult children who just moved back into the house, as they are worried about their emotional state and do not want to upset them. A qualified financial planner could be best positioned to encourage open conversations that consider the entire family unit. The financial planner can also help you work through your financial constraints by identifying areas where extra savings can be unlocked using tax incentives.
Wentzel says there is also a powerful message for young adults who are delaying responsibilities like accumulating their own assets and saving for retirement:
“At age 25, you need to save 20% of your salary every month until retirement if you want to get around 60% of your current salary at retirement (assuming a real investment return of four per cent per annum). But if you delay saving for retirement until you reach 35 you’ll need to save 30% of your salary every month.”
He concludes that while parents’ hearts are usually in the right place, sheltering their adult children from their responsibilities can be detrimental to both parties in the long run.