What you owe your kids

Sure, you want to give them a boost in life. But for both your sake and your kids', you have to cut the financial cord some time. Here's how.

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By Marlys Harris, Money Magazine senior editor

Generous to a fault
$38,000: Avg. amount provided by parents to adult kids through age 34
$50,000: 45% of boomers have saved less than this amount for retirement
Source:Family Support during the Transition to Adulthood, October 2004; Employee Benefit Research Institute 2007 Retirement Confidence Survey
owe_kids.03.jpg
Mother, Can You Spare a Dime?
Nine out of 10 affluent boomers say they've given their adult kids a hand with their finances. Here's what they help with.
College loans 69%
Buying a car 54%
Rent or utility payments 35%
Credit-card debt 21%
Down payment for house 19%
Notes: Affluent boomers have household income of $100,000 or more; adult children are ages 18 to 34.
Source:Ameriprise Financial Money Across Generations Study, November 2007
How to retire comfortably
Money Magazine's Walter Updegrave talks about why it's important to plan your savings now, so you can retire comfortably later.

(Money Magazine) -- At this point in their lives, Tony Carideo, 57, and his wife Linda, 56, of Bloomington, Minn., thought the financial load of raising their four kids would have become considerably lighter. But so far they haven't noticed much extra cash sloshing around in their bank accounts.

Only their eldest child, Max, 26, an engineer, is entirely off the family books. Nick, 24, has a B.A. in psychology but needs an advanced degree to get a job in his field. While he decides whether to go for it, he lives at home rent-free and works at a bike shop.

Greg, 21, is a studio art major in nearby Minneapolis, and the Carideos figure that to help him become financially stable after graduation they may have to provide startup cash for a gallery or studio.

Daughter Olivia, 19, is taking a yearlong $17,000 course to become a hairdresser. That's much less than her parents spent on education for each of her brothers, so the Carideos plan to even things out by paying her rent for a few years after she graduates.

By the time they're done, the couple figure they'll have spent upwards of $250,000 staging their children for liftoff. For all their generosity, the Carideos are not multimillionaires. Their joint income is about $135,000 - he runs an investor relations business, she's a teacher - and they have a retirement fund of $500,000, which may not be enough for them to live comfortably throughout their retirement.

Nevertheless, Tony Carideo is determined to do whatever he can for his kids, even though his parents didn't help him much when he was starting out. "We're living now in very different economic circumstances," he says.

Lots of other parents these days apparently feel the same way. Research shows that moms and dads have been spending quite a bit on their adult kids in recent years. According to a 2004 University of Michigan study, parents provided about $2,200 a year in aid to children ages 18 to 34; upper-income parents gave more than $4,000 annually. Over the past 30 years, there's been a 50% increase in the number of adult children living in their parents' homes - which by itself increased parents' outlays by nearly 20%.

All told, a 2007 survey by Ameriprise Financial found about 9 out of 10 parents give money to their grown kids for major expenses: credit-card balances, car insurance, student loans, you name it. Have baby boomers raised a generation of whiners who can't live within their means?

Doubtless, some have. But many parents say their kids work hard (the Carideo boys, for example, each paid half of their college tuition); it's just that the price of independence is so much higher than it used to be. To compete in the job market, you need four years of college and, increasingly, an advanced degree.

But with tuition rising at more than double the rate of inflation, financing that education has become a lot like buying a home - few can do it without borrowing heavily. Research by FinAid, an online guide to scholarships and loans, shows that two-thirds of college graduates leave campus in debt (average amount: $19,000); grad students who borrow typically add another $27,000 to $114,000 to the tab.

Even with their expensive degrees, young people find it harder to get a foothold in the job market; the competition is stiffer partly because of the sheer numbers of the baby boomlet, so many of them college grads. While they look for a position in their field, many newly minted B.A.s and M.A.s take low-paying temporary jobs, often without benefits, that can't cover the high cost of housing in the big cities to which they gravitate. "Parents become the only backstops for a lot of necessities," says University of Houston professor Steven Mintz, author of Huck's Raft: A History of American Childhood.

But there's another factor at play: Young adults, like many of their parents, have developed a strong appetite for consumer goods and a "gotta have it now" mentality. Prime example: a house. "Parents scrimped for years to get a 20% down payment together," says Ozgur Karaosmanoglu, senior vice president for investments at Raymond James in Washington, D.C. "Their kids are in a hurry. They want a house by the time they are in their late twenties."

And boomer parents are eager to help, says Mintz. "They had fewer children than previous generations and have bigger household incomes, so they believe they can afford the extras."

Maybe. But don't kid yourself. In 10, 15 or 20 years you'll be facing retirement, and few among us can say that we've saved enough. If you were to invest the $2,200 a year that the average parent gives to a child and earn 8% annually over 20 years, you'd add $78,000 to your portfolio - money you might desperately need one day. Meanwhile, your openhandedness could be hurting, not helping, your kids by keeping them everlastingly immature and ill-equipped to deal with financial challenges or setbacks on their own.

In the end, whether and how much you help your adult children is a personal choice that flows out of your affections and fears for them. Following are some guidelines for deciding when giving makes sense, whether you can afford to let the money go and what the consequences might be. Ignore them and who knows? Your kid could still be coming to you for his weekly allowance when he's 46.

Assess their true need

Once your kids are adults, they are supposed to take care of themselves. So before writing a check, ask yourself whether the expenditure is worthwhile. That, of course, is a judgment call that may draw you into bitter squabbles about each request.

So here is a useful acid test from Eileen Gallo, a psychotherapist who, with her husband Jon, a trust and estate lawyer, co-authored Silver Spoon Kids: How Successful Parents Raise Responsible Children. Consider, she says, "whether giving your kids money will speed them toward independence or prolong dependency."

That criterion makes sense. New plasma TV? Not likely to encourage anything but your kid becoming a couch potato. A vacation in Barbados? Better you should go. A course to enhance computer skills? Yes, if it helps your child get a better job. A second master's degree? Depends. "Your child may just be delaying adulthood," says Jon.

The same standard should apply if your child says she needs to move back home. That you can provide TiVo and clean sheets is not a good reason for your daughter to retreat to her bastion of Beanie Babies. But if she's lost her job, flunked out of college or fallen ill, a few months to regroup at home may get her back on her feet - if this isn't the fourth time you've provided such help.

Not every decision is so neat and clean. Say your son's car collapses and dies on the freeway. Without it he has a two-hour trip by bus to his job, and his boss does not tolerate late arrivals. Before you rush to the nearest car dealership, find out what your son has done to solve the problem. Has he asked co-workers about car pools? Or priced out an old clunker that would serve as a stopgap until he saves up for new wheels? Has he tried the bus? How much you help should correspond to the efforts he's made on his own behalf.

You may want to offer assistance simply to reassure yourself. Say your daughter loses her health insurance or can't get any from her current employer. (About 42% of the uninsured are between age 18 and 24.) As a matter of self-preservation, you may want to contribute toward a high-deductible policy for her. If she develops a serious illness, you and your spouse will likely be the ones to pay the bills. With insurance at least you limit your damage.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.