The real threat to clients' retirements may be living in their basements.
One of the greatest threats to investors' retirement
income isn't a volatile stock market or the demise of the Social
Security system. It isn't even escalating health-care costs or
It's the reappearance of needy 29-year-old Junior, who comes calling with his hand out just as investors hit the retirement homestretch. "It's staggering," says Sacha Millstone, an advisor who manages $220 million for clients in the Boulder, Colo., area. "I've had families essentially borrowing their home equity in order to buy a house for their adult kids," says the senior vice president of investments at The Millstone Evans Group.
Millstone isn't alone in grappling with the financial impact the boomerang population (ages 18 to 34, give or take a year or two) is having on their baby boomer parents. Scottsdale, Ariz.-based advisor Stuart Spivak says his office has one client who not once but twice liquidated IRA accounts to help an adult daughter. Now, the client is in the process of cashing out a retirement plan to pay for a niece's college-all before she, the client, hits the age of 59-and-a-half. "We sent a letter explaining all of the costs, taxes and penalties to her, but she made the withdrawals anyway," adds Spivak, who says that the emotions involved with wanting to help adult kids can play havoc with boomers' best-laid retirement plans.
In actuality, Junior may or may not live in your client's basement. He may even be a she (daughters can do just as much damage as sons) and probably is living some place that's a lot more expensive. Either way, you get the picture. More and more retired or nearly retired investors are engaging in something that is extremely difficult for even the brightest advisors to accommodate in a financial projection: unplanned giving to their adult kids. Advisors say that with increasing frequency, boomers are being called upon to help or bail out adult children at a rate that in some situations will undermine their own retirement.
In fact, the number of adult children living at home is already startling, and it's creeping up. Today, some 18 million adult kids between the ages of 18 and 34 have either returned to the roost or never left, a 44% increase since 1970, according to U.S. Census Bureau data. Nearly 39% of women and almost 46% of single men live with parents, up some 10% since 2000.
In online forums that run the gamut from Wall Street Journal blogs to boomerang Web sites like QuarterlifeCrisis.com, boomerang "kids" bemoan the cost of being an adult and defend (sometimes gleefully) the money they save (or can spend) when rent and everything else is free at mom and dad's. Like good old Tripp, the charming Matthew McConaughey character in the 2006 hit movie "Failure to Launch," these youngish adults make the most of their boomer parents' relatively luxurious digs, three squares a day and all the high-tech utilities they can use-gratis, of course.
If you're wondering whether there is economic justification for the "failure to launch" syndrome, the answer is: kind of. Real wages peaked in 1973 and have leveled off for young adults since, says Steve Rugles, a professor of history and the American family at the University of Minnesota. Rugles and others suggest that while many boomers embraced their own independence in the 1970s, their kids aren't finding freedom nearly as enticing some 30-plus years later. Instead, they're facing slimmer wages as the costs of education, housing and car ownership continue to climb.
On the other hand, it's not surprising that young adults who grew up with luxury cars, Coach bag collections, Ralph Lauren loafers and frequent trips abroad are finding it easier to support their taste for the finer things if they don't have pesky household bills hanging over their heads. And if they've never learned to save, where will they get the money for the new homes and cars, the regrettable and costly divorces, graduate school or even their own kids' tuitions? How about seed money for that next business venture? I was a little shocked in March when an acquaintance told me she was refinancing her McLean, Va., home for $350,000 to help finance her 27-year-old son. His dream? Turning his award-winning screenplay into the next blockbuster. "If we don't help him, who will?" she asked me. It probably would have been easier to muster a little more enthusiasm if I didn't know how asset-poor these folks are as they head into their late fifties.
Call it misplaced generosity, an entitlement program gone awry or even just ill-defined guilt. The fact is advisors are increasingly dealing head-on with the unexpected money demands of clients' adult kids. "This is such an emotional issue. It's hard for parents to understand helping adult children can hurt their own well-being," says Millstone. The best way to take the emotion out of the situation-a necessity if you hope to be effective-is to spreadsheet investments and cash flows to show the impact of the loan or gift. You want to be able to have a fact-based, sensible, uncharged conversation with clients, and give them meaningful information that they can then use with their kids.
Ideally, if they can't afford the cash outlay, they'll tell their kids the truth. "Sometimes, investors will say, 'Here's what my advisor says we can afford. Here's how much we can help. What will you contribute?'" says Millstone.
The most worrisome of situations are where financial gifts to kids will clearly undermine the parents' retirement. "Instead of acting emotionally, we try to go through the numbers calmly to show them that it's essentially financial suicide."
Obviously, deficit spending in retirement is a downward spiral from which there is no recovery. Spreadsheet cash flows going forward and the numbers themselves will tell much of the story. It's a good way to make sure clients see and understand all of the options they have on the table. "I think it really does help to lay out all the likely scenarios and be able to ask, 'Which is best for you?'" Millstone says. "I wish I could say my success rate is 100%, but that's not the case. I usually have some impact, but we often have to compromise."
For each family, the solution will be different. Some will say, "Look, we simply can't afford this." Others will decide to cut back on their own living expenses so they can help their kids. And some will help their kids at the risk of their own financial demise.
Spivak has seen some of those families, most recently a couple in their mid-seventies, whose 40-year-old daughter asked for $200,000 for a down payment on a home after her nasty divorce. The money accounted for a full 25% of the clients' retirement portfolio. "I ran the analysis and showed them it would mean an immediate 25% hit to their income and significant tax consequences. Then I asked what they'd do if one or both of them suffered health setbacks in the future and needed the money?"
Spivak didn't stop there. He made a suggestion: Instead of anteing up the entire $200,000, why not offer to pay a year's worth of the daughter's rent? Despite his spreadsheets and well-thought-out alternatives, the advisor was not successful. The couple coughed up the $200,000. "At the end of the day we have clients like this sign a letter stating that we've explained all the costs, taxes, penalties and impact of their decisions. You try to protect them from themselves, but logic is often overcome by emotion and tears," says Spivak, whose firm Spivak Investment Group manages $100 million.
While his clients generally have between $400,000 and $4 million in investable assets, many can be hurt by sizable requests for financial help from adult kids, he says. "I can't say what's caused this trend," says Millstone of the failure-to-launch phenomenon. "But somehow, in some parts of this country, the upper-middle-class norm has become, 'Anything our kids want, we're going to get for them. Period.' I try to keep my values out of it. My job is to show them the consequences of certain actions. But it is up to them to make the decision of what fits their value system."
At the end of the day, all any of us can do is help investors understand the consequences of their actions. And if we're lucky we can try to get a jump-start on these problems now, so they aren't so bad tomorrow. One way is by counseling clients' kids on the basics of financial planning and budgeting while they're still young. That's a gift that San Diego-based advisor Margaret "Peg" Eddy has been offering to clients for their kids for years (cost: $245 an hour).
"We're not doing the trust fund babies any favor," she maintains. "I have 30-year-old women come into my office who have never written a check or balanced a checkbook before. We're making them easy marks."
And their parents a whole lot poorer, in the process.
Tracey Longo is the Washington editor
of Financial Advisor magazine. She welcomes your questions and comments
at firstname.lastname@example.org. Longo is the author of several personal finance
books, including Cliffnotes: Investing for the First Time (IDG Books
Worldwide). She teaches public relations at American University in