Are Your Adult Children Destroying Your Retirement?

I can still remember the days when the term “generation gap” was all the rage. Back in the late 1960s and early 1970s, that term was bandied about to describe the yawning philosophical chasm between Baby Boomers and their parents on topics as diverse as the Vietnam War, the length of one’s hair, and different attitudes toward sex.

Over the years, though, the term has faded from widespread use. But another gap in inter-generational thinking grew steadily more evident when it came to saving and spending. The folks Tom Brokaw called “The Greatest Generation” grew up in Depression-era America, fought World War II, then scrimped,  saved, and made their way through college on the GI Bill, somehow managing to land jobs that enabled them to squirrel away enough scratch for an FHA-financed suburban starter home.

They might have arrived in Eisenhower-era prosperity. But having seen how tough a dollar could be to come by, they learned the value of every greenback they earned.

Around the same time, the dawn of TV and its benefactor, the Great American Marketing Machine, ushered in the idea that saving, budgeting and spending wisely were as passe as Zoot suits. “Why Wait? Buy now!” became the catchphrase of the Pepsi Generation. Their parents, who had experienced hardship in the gritty, teeming urban enclaves of the 1930s, weren’t easily hoodwinked by the hype. Not so their kids, who knew little other than full stomachs and leafy suburban idylls.

This two-cent history lesson easily explains a phenomenon that got its start about six years ago. It’s one that worries a great many financial advisers.

Once a parent . . .

Please note that reference to six years ago, the year that ushered in the Great Recession. Suddenly the generation that had rarely denied themselves anything began to find themselves in straits seen infrequently since the Great Depression.

As they lost their marriages, their jobs and in many cases their homes, those in their 40s and 50s turned to the only people they knew would be able to provide financial assistance. Those were the same people who, scarred by early exposure to deprivation, never lost the belief that you save for a rainy day.

Now you had the 70- and 80-year-olds of the Greatest Generation, folks who had been careful about finances to the point of always searching for the best savings account rates (crude as their methods were back then), being called upon to help bail out their overindulgent middle-aged sons and daughters.

Among the financial advisers who have flagged for me this lamentable state is Gregory De Jong, a Certified Financial Planner with Savant Capital Management in Naperville, Illinois. He estimates one quarter to one third of his retirement clients are providing some form of financial assistance to their adult offspring.

“It’s a bitter irony that the children who have treated themselves to larger homes, fancier cars and more lavish vacations than their parents ever had are now relying on mom and dad to bail them out, ” he told me, adding the parents’ desire to help their sons and daughters is jeopardizing their own retirement security.

Of particular concern to De Jong is that some elderly moms and dads may actually be enabling the poor fiscal habits of their sons and daughters.

“They would not think of pulling $20, 000 out of their IRA to take a vacation for themselves, ” he points out. “But they won’t hesitate to pull that much out to pay off their children’s credit card debts… It keeps the child from getting the financial advice they need regarding debt management.”

Also observing the trend is Gary Marriage, Jr., founder and CEO of Nature Coast Financial Advisors in Crystal River, Florida. “It’s like the parents are coming in to bail out their kids, ” he says. “Parents will always bend over backward for their children. But if they don’t set it up right, they’re going to go broke themselves.”

Involve third parties

The big problem with elderly parents aiding their middle-aged daughters and sons is emotion, experts say. When faced with the choice of giving aid or jeopardizing relationships with children and grandchildren, the older adult often falls victim to emotion and gives in to the pleas of his or her offspring.

Marriage and De Jong both strongly urge third parties to get involved in the loan of money from older to younger family members. “We tell them, ‘Bring in your adult children and let’s all sit down and see if this can be worked out, ‘” Marriage says. “I want to show the kids the effect on their parents of getting this loan.”

The loan terms should be agreed to by parent, offspring and third party, whom De Jong says can also be an accountant or business-savvy family friend. If the issue was caused by poor financial decision-making or debt management, the offer of financial assistance should be contingent on the younger adult taking credit counseling or a course on debt management, De Jong says.

Adds Marriage: “I tell my clients this is not a 100 percent foolproof plan. But at least it’s a structure, and they have something in writing everyone will follow. Just as you get a contract from the bank, you should give your child a contract, and make sure they follow it.”

I say it’s time to close the “generation gap” separating elderly parents from middle-age kids on issues of financial responsibility — and that should happen before the elderly are separated from their life savings.

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