What to do if your adult child ‘boomerangs’

You’ve worked hard with your team of financial consultants and advisers to build a nest egg that you and they expect to support your retirement lifestyle. But what happens when your 22-year-old college graduate comes back to you – “boomerangs” – asking for financial help or perhaps a return to his or her own room in your house? Perhaps more disturbing, how do you respond if your 45-year-old son suddenly becomes a victim of the economy and loses his job?

If you find yourself in this situation, you’re not alone. Nearly 4 million people between the ages of 25 and 34 live with their parents, according to the National Credit Union Administration. After 2003 college graduations, 61 percent of college seniors indicated they would return home to live, and 24 percent expected that stay to extend beyond a year, according to MonsterTrak.com.

Don’t question your parenting skills, and you’ve demonstrated through your own money management skills and savings program how money should be managed. But sometimes the best-laid plans go awry, and even well-educated children find themselves in need of financial assistance.

Parental instinct says, “of course we’ll help.” But before you open your purse strings too wide, take a breath and think about the implications of your decision. The question you, as a parent, must ask yourself is: Will your actions enable your middle-aged child to continue to flounder financially, or can you structure your assistance so you empower your middle-aged child to rebuild his or her financial independence and begin working toward his or her own retirement security?

Plan now to add “strings” to your offer that provide ways to help not only this particular situation, but also guide your child toward long-term financial stability and independence.

How assistance affects you

By helping a child maneuver out of financial distress, you directly affect the financial security you’ve worked so hard to create for yourself. You’re depleting the assets you’ve earmarked to provide income during your golden years. Typically, you’re doing so at a time when you should be making significant additions to your retirement accounts.

Take a look at an oversimplified hypothetical example. Let’s assume you’re 10 years from retirement and planning to maximize your contributions to your company’s 401(k) [$14,000 in salary deferral plus $4,000 catch-up contribution]. You’re also planning to make your 2005 IRA contribution plus catch-up contribution ($4,500). You’re on track to invest $22,500 in 2005 and even more in future years as contribution and catch-up limits increase. These are the funds you are counting on to provide a substantial boost to your retirement security.

Along comes your college graduate who asks to return home to live. She asks for help with daily living expenses (food, gasoline, etc.) plus student loan payments and other debt payments on which she’s fallen behind. Bottom line: The $22,500 you had intended to sock away in your tax-deferred retirement accounts is spent paying expenses for your child.

Not only have you lost the $22,500 that could have been added to retirement security, you’ve lost the investment returns during the next 10 years those contributions could have provided. Assuming a 7 percent return, that’s an additional $18,866 you’ve foregone, and a total of $41,366 that is no longer available to tap for retirement income.

Your situation could be much more complex, with even more devastating effects to your retirement plan.

In the end, helping your children probably isn’t a decision at all – it’s a gut reaction. But before you spring into action, think about the consequences for you as parents, and for your adult child as someone attempting to gain financial independence, and for other siblings and their emotional and financial well-being. Develop a plan now – well before your adult child knocks on your door – so you’re prepared to respond in an objective, intelligent fashion that preserves as much family wealth as possible.

Tom Sedoric is senior vice president-investments for AG Edwards and Sons Inc. in Portsmouth. He can be reached at 800-422-1030.