Are your adult children sabotaging your retirement?

By Mark MacSymon, Certified Financial Planner and Wealth Manager at Private Client Holdings

Are your adult children sabotaging your retirement?

An increasingly common issue in South Africa these days is adult children still being financially dependent on their parents. This is due to low entry-level salaries, tightening credit extension, and high property prices – all factors which make it difficult for young adults to set out on their own.

In many instances, adult children continue to live with their parents well into their late 20s and 30s, and don’t contribute to everyday household expenses. There are other ways that adult dependency manifests itself within families – such as a situation where a regular income is paid to an adult child, much the same as a salary or a stipend.

The effect on the parents’ retirement plan

Very few South Africans are fortunate enough to retire comfortably, and when you add the fact that many people will live longer than originally anticipated, the result is that very few families can afford adult dependants.

Families that support dependent adult children need to carefully consider the effect this has on their retirement plans. Gratuitous and supportive disbursements can have a devastating effect on their likelihood of retiring comfortably. The worst-case scenario is when the parents’ retirement plans are eroded by financially dependent adults and over time, the roles are reversed and it is the parents who require financial support from their ill-equipped children. These family scenarios are not only stressful and traumatic for parents, but they typically have the tendency to create tension among siblings as financially independent children become resentful towards dependent children for placing their parent’s affairs, and old age, at risk.

A good financial planner should develop cash-flow models for their clients which graphically demonstrate the long-term effects of such support on the longevity of their retirement capital. These exercises can be useful tools to help change the behavioural patterns of both parents and dependent children.

In the basic example below, a retired couple with investible assets of roughly R9.3m to start, can comfortably withdraw R35 000 per month, increasing at inflation, over a 35-year retirement planning period. However, in the event of a financially dependent adult increasing household expenditure by R10 000 per month for the first 10 years of his parents’ retirement, it is likely to have the effect of accelerating a complete draw-down of retirement capital by a full six years.

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Exercises like these help retirees rationalise the often-compulsive decision to increase draw-down rates on living annuities in order to relieve budgetary pressures inflicted by adult dependents in the immediate term. Unfortunately, over the longer term, the permanent loss of capital through a draw-down spike, even if for just one year, can severely diminish the longevity of retirement savings.

Detrimental effects for the dependent adult

Another problem that arises with adult dependents who typically enjoy a standard of living that they ordinarily wouldn’t be experiencing if they had set out on their own to make a life for themselves on a shoestring budget, is that they tend to be less budget conscious, spend more frivolously, and anchor their lifestyle habits at a relatively unsustainable level.

These young adults should be acutely aware of budgetary constraints and saving where possible. More importantly, the physical actions and psychological adjustments taken by budget-constrained adults towards being more financially independent will be vastly different from those of dependent adult children. These activities might include critical thought towards ways in which income streams can be increased, a hunger for new job opportunities, an attitude of working harder and smarter, or a desire to take on more responsibility to enjoy potentially higher pay increases. In the long run, the family unit is benefited by the collective ability of being more financially independent.

How to remedy the situation

In most cases, the parents’ financial adviser should meet with dependent children and explain to them the affect their dependency is having on their parents’ golden years. This form of counselling is often quite effective and as soon as children recognise the long-term impact their decisions are having on their parent’s financial wellbeing, the more they are likely to take action and change their behaviour. Completely cutting-off the support is unlikely to be the solution, but a plan which outlines a gradual slowing of support over a defined period will allow both parents and children to adjust.

Unfortunately it’s not always possible to simply place all of one’s cards on the table for all to see – matters of finance are often sensitive and emotional topics of conversation. The last thing any fair parent wants is to be brandished with accusations of unequal support, preference and favouritism. Nevertheless, a skilled financial mediator or planner should help guide a strategy of slowing support and budget rationalisation.

How to encourage children to be less financially dependent

Parents should start educating their children early to avoid dependency issues in the future. “Parents are best advised to encourage children to take ownership and responsibility of matters involving money. Inform children about household running costs. Providing pocket money as reward for contributing toward household chores is a good place to start. Encourage a disciplined culture of savings, no matter how small, or set a savings goal to purchase a wanted item. These basic activities of aligning incomes with expenditure will help to provide children with a more principled framework for handling matters involving money in their adult years.

When the time is right, share details of household expenses, and set periods where as parents you will stop contributing to certain expenses – such as paying medical aid, etc. A tough stance needs to be taken – as the adage goes, you have to be cruel to be kind. While allowing children to remain dependent may indeed mean that they have a better lifestyle in the short run, it is not good for parents nor their children in the long run.

The problem that often arises with people who were not encouraged to save and take ownership of money matters when they were young, is that when they first start earning an income, they make no provision for a savings component in their budget. And over time, as they become accustomed to their non-saving ways it becomes increasingly difficult to then find space in an already allocated budget for savings – meaning that the likelihood of saving diminishes year by year.