So, the last of your children have left the nest and you are finally ready to enjoy your golden years. Not so fast, boomers!! According to Pew Research Center analysis released last month, more millennials are now living with their parents than during the Great Recession. As of the first four months of this year young adults living in their parents’ homes has increased from 24% to 26%. With all of these sons and daughters moving back home, who is paying their living expenses?
“More millennials are moving home to avoid high rents under the guise ‘saving money,’ but this significantly impacts Mom and Pop’s retirement savings,” explains author and Certified Trust & Financial Advisor, Chris Carosa, M.B.A. (http://heywhatsmynumber.com/) “And you might be surprised by just how much it’s costing them!”
Carosa offered the following tips for when your adult children come back home:
Boomer: What are some of the reasons so many millennials are moving back home with mom and dad? High rents nationwide? Poor job market?
Carosa: We’re seeing many young adults going back to the nest even if they have jobs. It’s obvious that if you don’t have a job you don’t have a choice and you’ve got to go back and live with your parents. But even those with jobs are moving back in. Why? Well, this has been the worst post-War recovery and good paying jobs haven’t been as available in the last few years. In addition, the size of student debt eats up a substantially larger portion of one’s salary. Finally, even if you can pay for everything, there’s an instinct to save to afford better housing for when you eventually do move out.
Boomer: How much damage could housing your adult child do to your retirement fund? Carosa: It depends on a number of factors, including the cost of living of where you live. It doesn’t have to damage your retirement saving and could actually help if your child pays all marginal expense and you charge your child rent. On the other hand, since there’s no marginal increased cost to continue housing your child, a better idea might be to “charge” your child rent but, instead of collecting it, have your child contribute it to their own IRA. So, instead of hurting the parents’ retirement saving, an adult child living with you could actually help your child’s future retirement. I devote a significant portion of my book Hey! What’s My Number? to the advantages of millennials saving for retirement.
Boomer: What kind of dollar amount are we talking about here, especially taking into account compound interest?
Carosa: At $8,000 per year (the total 10-year expense is $80,000) it really adds up. If you put that money into a retirement savings plan and earned the average long term rate of return (10% a year), you would have earned an additional $60,000 in interest alone. Let’s say it costs 10k/year in support, (the total 10-year expense is $100,000), if, instead, you put that money into a retirement savings plan and earned the average long term rate of return (10% a year), you would have earned an additional $75,000.
By suspending contributions to your retirement plan to pay the living expenses of your adult child, you stand to have between $140,000 (the $80,000 principle + $60,000 in interest earned) and $175,000 (the 100,000 in principle + the 75,000 in earned interest) less in your retirement account when you retire in ten years (the gap is larger if you are retiring in more than 10 years).
Another calculation. If you only support your adult child for 1 year, at a rate of $8,000/year and an interest rate of 10% compounded annually over 10 years, that ends up to be a loss of about $20,000 (the $8,000 + the interest earned) – no small amount even for just one year of support. At the 10,000/year rate, that’s around $25,000 lost over 10 years of compound interest at the same rate.
Boomer: Should you set some financial ground rules if you find yourself supporting your adult child and what should they be?
Carosa: Setting financial rules at the beginning makes sense for both the parents and the adult children. Do this in the very beginning before there’s a lot of emotional investment in the status quo. This applies both to the parents, who might not want the child to leave the nest, and the child, who might become too comfortable living at home. At some point, the babies need to fly. Plan on it by establishing a “progression” schedule at the outset. For example, have the child devote any excess earnings to paying for food, clothing, transportation, and insurance before using it to go out on the town. This could be done through budgeting so the child has the ability to use at least some of their money for fun. In addition – and this is where the “progression” comes from – determine a time schedule that includes milestones, the ultimate milestone being moving out.
Boomer: What should boomers do if these new living arrangements are not working out?
Carosa: This is the age old question and a situation that requires tough love. They don’t call it “tough” for nothing, but, remember, it is love, too.