When is it time to close the ‘Bank of Mom and Dad’? Wealth managers advise the best ways to support your adult kids amid looming recession
Parents to adult kids across the U.S. are considering coming out of retirement or refinancing their homes in order to prop up their kids’ bank accounts – and the cash requests are only going to keep coming.
But when is it time to close the Bank of Mom and Dad in order to protect your own financial security, especially in the face of a global recession?
Economists are divided over whether or not the U.S. will plunge into a period of major economic downturn. The more optimistic among the group cite the slowdown in U.S. wage growth which had accelerated inflation, and on Thursday the Bureau of Labour and Statistics announced that U.S. Inflation has fallen to its lowest level in more than a year.
Others, such as Nouriel Roubini of New York University’s Stern School of Business, said the world is on course for a “train wreck”.
Mohamed El-Erian – who serves as president of Queens’ College at the University of Cambridge – has warned that the likelihood of a U.S. recession is “uncomfortably high.”
What’s clear is business leaders are lacking in confidence while many individuals are panicking about their financial security.
During the pandemic younger generations increasingly had to rely on their parents for support, after being thrown into the world of work often with no prior experience or savings to fall back on.
College-age kids are now increasingly panicking about their financial stability – with a recent study finding they’re as worried about inflation and recessions as they are about mass shootings.
Last spring savings.com found that one in two parents of children aged 18 or over were helping their kids make ends meet. In fact, parents spent 23% more on their children’s expenses ($605 per month) than they do contributing to their own retirement or savings ($490 per month).
Of the 1,000 parents who were surveyed the majority were supporting children aged 24 and under. Yet 17% were financially aiding offspring who were 25 to 29 years of age, and 19% were financing children aged 30 or older.
The research also found that 25% of parents were willing to pull cash out of their savings or retirement accounts, 17% would take on debt, 9% would come out of retirement entirely and 7% would put their homes on the line by refinancing.
Children are largely spending their parents' cash on necessities like food and rent, however 46% of parents have also seen their money used for holidays, and 66% report covering their children's cell phone bills.
When should parents be reducing or cutting off financial support?
So how do parents balance their financial needs with that of their children? The answer is setting up children for success as early as possible, wealth managers said.
"Children can learn fulfillment from productive chores for which they may earn an allowance and buy something they have been wanting, or get the thrill of saving the money. Looking a bit further down the road, parents need to think about what best prepares their children to stand on their own, assuming there isn’t dynastic wealth involved," said Kevin Philip, managing director at Bel Air Investment Advisors.
"Too many families seem to hope for a lottery ticket in sports or entertainment for their children when the reality of that becoming a successful career is very small. The surest way for children to graduate from the bank of their parents is to pursue education and garner diversified experiences in extracurriculars that interest them and ideally bolster their resume."
Paul Denley, chief executive of London-based boutique investment firm Oakham Wealth Management, echoed this, adding: "There comes a time when it is healthy for any young person to feel independent and stand on their own two feet. The groundwork for this should start at school, university or college - it makes sense for students to find work during the holidays or part-time and get a feel for what it means to work and get paid for that effort, and weigh up the value of money from the endeavors.
"If everything is handed to you on a plate you might not feel like any success is truly your own. How much more satisfying is it to buy your first pair of heels from Christian Louboutin or fund your own scuba diving holiday when you’ve earned the money yourself? Clearly these are luxury examples but the same could be applied to more modest ambitions."
What is the best investment for children?
As well as medical insurance, investing in a child's education, psychological wellbeing and confidence is the best way to prepare them for later life, the experts added.
Philip continued: "More financially speaking, 529 plans for educational savings are helpful and as soon as income is earned, maxing out ROTH IRAs, traditional IRAs, and/or 401ks should be encouraged but not demanded. Most times one can’t do everything. In the first few years of buying a house, for example, one may not be able to make the full contributions to retirement plans, but I think that is OK."
Denley added that parents should stay away from "lifestyle" support as much as possible, adding: "If parents start a fund for children at birth with the intention of presenting the nest egg to the child at age 25 or 30, this represents a significant investment period, including many investment cycles, and the reinvestment of dividends will lead to compound returns. Between December 1978 and December 2022 the MSCI World Index has delivered over 10% per year on average, a rate of return which will double the original investment every 10 years.
"The main challenge is ensuring that this nest egg is not interfered with (ie spent) along the journey."
What should you teach children about assets?
Helping your children understand what questions to ask and who to trust with financial management is key to their financial success, added Philip.
Parents should also aim to teach their families about stocks, helping them set up their own accounts and aiding them with cost averaging into index funds on a monthly basis.
The personal finance expert highlighted that trusts with a built-in creditor and asset protection can be established and if this is not the case, then pre-nuptial agreements in future marriages may be "prudent".
How should parents handle conversations about living expenses?
Once a child is out of education and is on the hunt for a job, this is a flag for parents that it's time to take a step back. Denley said the considerations of how much financial support is needed comes down to how much is required to allow the graduate to focus their energies on finding gainful employment.
"It would seem unwise to provide their own accommodation if they can do what they need to do from the family home until they can afford their own living expenses. Once the daughter or son is gainfully employed, parents could help with the deposit for a flat and buy a few pieces of furniture to ensure their prodigy can focus on their new career without having to sleep on the floor.
"The other consideration is to avoid giving a regular allowance, rather providing extra resource when requested. This at least puts pressure back on the child to have to ask for the cash, rather than expecting it to appear from the magic money tree," he added.
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