RIAs grapple with a rising threat to retirement: Adult kids that move back in with mom and dad

The adult children of baby boomers are moving back to the nest where, in increasing numbers, they’re mooching off their parents for expenses ranging from car loans to a night on the town.

It may sound like an episode of “Dr. Phil,” but it’s a trend that has real-life implications for aging parents who are finding their retirement savings — already eroded by a shaky economy — in even more jeopardy.

RIAs have recently have found themselves in the uncomfortable position of telling clients that if they don’t stop funneling cash to their adult kids they will need to dramatically change their expectations for retirement. See: RIAs overwhelmingly back 529 college plans despite high fees and vanilla investment options.

“This means advisors have to have difficult conversations,” says Mike Watson, director of practice management at TD Ameritrade. “Advisors need to be respectful and don’t want to over-step their boundaries.”

But responsible RIAs may feel that an intervention of sorts is necessary. A telephone survey by TD Ameritrade of 1,007 adults shows more than half of baby boomers interviewed (54%) have been housing their adult kids for three months or longer and 42% said it has had a negative impact on their finances. Fully 76% of baby boomers feel obligated to financially support adult children fallen on hard times and 57% are willing to support them even it means taking away from their own retirement.

The survey was conducted from March 23 to April 11.

Mike Watson: Advisors have to have
difficult conversations.

Damage control

Watson says the best way for advisors to handle this delicate issue is to ask clients some simple questions to figure out how rapidly their children are chipping away at the retirement nest egg. Better yet, Watson suggests, let the parents discover the truth for themselves by keeping a journal documenting how much money they spend on their kids every month.

Advisor Lauren Lindsay with Personal Financial Advisors in Covington, La., whose firm manages $90 million, recalls using a similar strategy a few years back when she had a Boston client who couldn’t understand why their neighbors were so far ahead of them in retirement savings.

Lindsay had the parents document exactly how much money they were spending on their children. In total, the costs were steep. Putting four children through private college and letting them all live at home after college without paying rent was killing the couple’s retirement savings. She estimated that their generosity had cost them $800,000.

Once the advisor is privy to this knowledge, Watson says, it’s time to craft an action plan.

Just the facts

Taking the emotion out of this type of situation and focusing on the numbers is often a huge help, says advisor Rick Kahler, principal of Kahler Financial Group in Rapid City, S.D., whose firm manages some $135 million in assets. He approaches the topic by telling clients that if they continue to fund their adult children’s lifestyles it will reduce their living expenses by a certain percentage.

“I have the best results when I don’t shame them, I normalize their sadness and fear about the situation their kids are in and give them financial options,” Kahler says in an e-mail. “I found it’s counter-productive to tell them they can’t and shouldn’t be helping out the kids. Show them the consequences in a non-judgmental manner.”

Holtzman: It may be okay for
baby boomers to give children some
extra cash or a place to
stay, they need to refuse bad
deals which could harm their own
credit and livelihood.

Jim Holtzman, an advisor with RIA Legend Financial Advisors Inc. in Pittsburgh, has heard his share of stories about entrenched grown children and parents’ concerns about when they will get off the family payroll.

Holtzman is frank with his clients. “It means that the retirement scenario you’ve been working on for 20 years has been derailed,” he tells them. “If you’re going to spend on your kids then you have to cut somewhere else.”

Legend Financial manages nearly $400 million in assets and oversees about 220 clients.

Blame it on the advisor

Watson says one of the best things advisors can do for their clients is to become the scapegoat in this sticky scenario.

Jeffrey Powell, president and CEO of Polaris Equity Management, a San Francisco-based RIA that manages about $260 million for 340 affluent households, tells his clients to blame him.

“It makes it easier on the parent and it removes the blame from them so they don’t feel so guilty,” Powell says. “It places the blame on us because they’re telling their kids that 'My financial advisor said no.’”

Advisors find this works like a charm.

Tough love

Certainly, advisors recognize that times have been tough and there are many young – and not so young – adults who have lost their jobs and simply can’t find work. Obviously, no one wants their children to be homeless so it’s only natural for boomers to invite them back home.

But the bottom line is that parents need to set guidelines and make sure their children are making progress looking for work, Holtzman says.

Parents should strongly encourage their children to take a job for which they’re under qualified – one that will at least allow them to make car payments and keep up with their student loan payments.

“What happens is they move back home and there’s a surge of looking for a job, but suddenly it’s so comfy there’s no rush to find a job,” Holtzman says. “I always tell our clients to set expectations.”

Lindsay says a little tough love from baby boomer parents will ensure that their children’s return home is brief. She recalls her own experience years ago when she was living with her parents. Lindsay had just returned from Europe because her dad was ill and she was staying with her parents until she found a new place.

While at her parents’ house, Lindsay was working, paying rent, and doing chores around the house. Most importantly, she was hunting for a new place because life at home was no piece of cake.

“I moved out as soon as I found cheaper accommodations — and someone who didn’t give me a chores list every day when I came home from my teaching job,” she says.

Steer clear of bad deals

While it may be OK for baby boomers to give children some extra cash or a place to stay, they need to know when to say no regarding financial help which could harm their own credit and livelihood, Holtzman says. Some of his clients’ children have asked for help with real estate bailouts – which he flat out advises against.

“I’ve seen where the parents had to throw money at real estate (owned by their children) and the kids still ultimately had to file for bankruptcy,” Holtzman says. “The kids have to deal with that on their own. They can’t drag their parents into an absolute black hole for a bad house.”