Northington Blog

Failure to Launch, Get Your Kids Out of Your 401(k) !

 

Mary Stewart and her husband refer to themselves as “underprotective” parents. They taught their kids to be financially independent, but their daughter Abbie landed back home after finishing school.  After a month of watching TV all day, Mary gave Abbie an ultimatum to “get a job, go to school or find a new place to live.”  A month later, her daughter was employed.                     

The Stewarts’ mix of support and tough love isn’t the norm. When grown kids struggle to launch, some anxious middle-aged mothers and fathers may fall into the parent trap -overextending themselves and ravaging their 401k plans. The recession upped the number of boomerang children returning home because they either lost their jobs or couldn’t find one after graduating, said the US Department of Education in a January 2014 study.  During a 2015 Pew Research survey, 39% of parents admitted helping adult children with errands, housework, and home repairs, while a full 48% admitted helping adult children financially.

How can you avoid the parent trap?  Here are five ways to help the kids without depleting your savings.

  1.   Determine your own retirement needs—then calculate how much is left for college or kick=starting a child’s launch
    • In her legal practice, Mary Stewart has witnessed what happens when parents ignore this financial planning fundamental, observing that in some cases, “When they retire, they’re destitute, and their kids don’t help.”
  2.   Avoid overextending yourself
    • Students can take out loans if you’re unable to pay for all  or part of college.  They’ll have skin in the game and start establishing credit
  3.   Set clear limits
    • When an adult child moves back in, spell out how long they can stay and what’s expected, such as paying rent or chipping in for groceries and utilities.
  4.   Provide a set amount of money
    • It’s one way for kids to learn budgeting while covering necessities such as health and car insurance.
  5.   Foster the habit of saving.
    • When kids start working, encourage them to contribute to a Roth IRA and if you can afford it, consider matching their contributions.

This approach allowed the Stewarts’ children to land on their feet.  But their mother admits she would have done one thing differently: no free room and board.  “Once they get a job, they ramp up their lifestyle since they’re not paying for things and don’t feel they can move out,” she says.  Instead, charge some rent and consider surprising them by returning it at the end.  Even better: Subsidize rent elsewhere, phasing it out as they become financially independent.  Once kids learn to live within a budget, parents will be better positioned to ramp up their retirement savings.

Stephen Northington is a CERTIFIED FINANCIAL PLANNER™ Professional with over 21 years of industry experience.  At Northington Investment Group, our branding message is financial comfort, measured by getting your entire financial house in order.  And our Wealth Management services are based on both performance and downside risk management. To schedule a meeting with Stephen, click here: https://calendly.com/stephen-northington

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