A new report from Bank of America suggests Gen Zers are relying on financial help from Mom and Dad — a “parent trap” that raises big questions about financial independence and the long-term impacts on their parents’ financial health, particularly their retirement savings.
The study found that 46% of adult Gen Z-ers rely on financial help from their parents, ranging from covering everyday expenses to helping with significant financial commitments such as rent, mortgage payments and other debt repayments.
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About one in four respondents to BoA’s study said housing expenses were a chief barrier to financial independence, and over half said they do not pay for their housing.
Rising costs of living, inflation, student loan debt and economic instability have made it increasingly difficult for young adults to achieve financial independence. The COVID-19 pandemic exacerbated these issues, leading to job losses and reduced income that disproportionately affected younger workers.
The Bank of America study highlights a significant trend of young adults relying on their parents, but it’s essential for parents to recognize the long-term risks. By setting clear boundaries, providing financial education and gradually reducing support, parents can help their children become financially independent while safeguarding their own futures.
Risks to parents
While providing financial assistance to adult children can be a way for parents to show support and ensure their children’s well-being, it comes with significant risks, chiefly the impact on the parents’ own financial security and leaving their children unprepared to handle their own finances.
Financial expert Suze Orman warns that continuing to support adult children can severely compromise parents’ ability to retire comfortably. Orman argues parents often underestimate the long-term financial implications of this support, which can reduce their own savings when they need it the most.
Impact on retirement savings
Parents who use their retirement savings to support their adult children may find themselves in a precarious financial situation. Some parents are still supporting their children well into their 40s, delaying their own retirement and putting their financial future at risk. This prolonged financial support can lead to parents working longer than planned or significantly adjusting their retirement lifestyle to accommodate the shortfall in savings.
The lack of adequate retirement funds can lead to a reliance on social security benefits, which may not be sufficient to cover all expenses, particularly healthcare costs that tend to rise with age.
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When to cut your kids off
Finding the right time to end financial support for adult children is a delicate balance. Orman advocates for clear and early boundaries to encourage financial independence, suggesting parents should gradually reduce their financial support and encourage their children to own their finances.
Parents can help by providing financial education, such as budgeting, saving and investing, to prepare their children for independence. It’s also important for parents to be transparent about their own financial situation and the necessity of safeguarding their retirement savings.
Practical steps for parents
Set clear boundaries. Establish clear expectations about the level and duration of financial support. Communicate openly about the need for your children to become financially independent.
Educate your children. Provide financial literacy education to help your children manage their finances effectively. This can include lessons on budgeting, saving, and investing.
Gradual reduction. Gradually reduce the financial support you provide to ease the transition. This will help them adjust to managing their own finances without a sudden shock. A baby step might involve asking the child to pay for their own mobile phone plan or to secure their own auto and health insurance.
Focus on retirement planning. Prioritize your own retirement planning to ensure you have sufficient funds to support yourself in your golden years. Seek professional financial advice if needed.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
