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How to financially support your adult children without breaking your nest egg

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Here is how parents can protect their nest eggs when their adult children move back home

If parents aren't careful, financially supporting their adult children could harm their retirement — and damage their kids' own financial development.

Of course, living in the time of Covid-19 brings its own set of unique circumstances. Many young adults are reeling from the economic fallout of the pandemic. While the unemployment rate decreased in May, it still sits at 13.3%.

Parents may want to help to help. They'll just have to make sure they do it right.

"They cannot under any circumstances put their own retirement at risk," said certified financial planner Tom Henske, a partner at Lenox Advisors in New York. "There is always another option.

"Even if that means that their kids come to live with them rent-free while this is going on — that is better, because once the money is spent, it is not coming back."

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Even the wealthy aren't immune.

In the Spring 2020 CNBC Millionaire Survey, conducted by Spectrem Group, 22% of millionaires said they provided financial support to an adult child who needed it since the onset of the coronavirus crisis. In addition, 21% said they had provided financial support to other family members.

The semi-annual survey, which polls 750 investors with $1 million or more in investable assets, was conducted in April.

If you want to help your kids out, make sure you don't give them an amount that is greater than or outside the scope of your normal excesses, said CFP Lawrence Sprung, president of Hauppauge, New York-based Mitlin Financial.

"If it is excess cash flow that you have every month or you are giving them money from a trip that was canceled that you won't go on again, that won't be an issue," he said.

You should be careful of the lesson you are giving your kids when you bail them out.
Tom Henske
partner at Lenox Advisors

If necessary, cut down your own budget to help out instead of turning to your retirement savings.

However, also bear in mind that you want to ensure your adult children are fiscally responsible.

"You should be careful of the lesson you are giving your kids when you bail them out," warned Henske, noting that these are extenuating circumstances right now.

"You can really go down a road that could cause irreparable damage to your kids in their own development as financially responsible adults, but also in their relationship with you."

If you are giving money to your adult children, here are four strategies to safeguard your nest egg and your children's financial future.

1. Be specific about your intentions

If your child needs financial help, make sure you clearly tell them what the money is for and whether or not it is a one-time event.

If they don't understand the parameters, they may get a false sense that the help will be ongoing, Sprung said.

"If you are not intentional about it and there is this expectation that you support them beyond this immediate need, you are basically defeating the purpose of allowing them to be an adult and start standing on their own financially," Henske explained.

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2. Consider a loan instead of a gift

Also specify whether your help is a loan or a gift. Henske prefers loans, so that the child can pay it back.

Write a contract with a set timeline — how long it will take to be paid back and how frequent the payments will be.

The payments can start out small and later increase, as your children hopefully find their footing.

"They write you a check every month, no matter how small it is, so there is some feeling of gratitude and payback," Henske said.

Don't feel guilty about making your child pay you back.

"You can always forgive the loan," he said. "You can't forgive the gift."

3. Help them craft a budget

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How to make a budget

Sit down with your young adult children and craft a budget with them.

Look at what money is coming in every month and what is going out. See what can be completely cut out or reduced the expenses column.

If they are outspending what they make, devise a budget that is going to work within their parameters, said Sprung.

Also, make sure they are paying themselves first in either an individual retirement account or other retirement plan through work, and contribute a minimum of what the company matches up to a maximum of 10%, he advised.

"Work the expenses out around the remaining 90%," he said.

"That will help put them on a path to be financially independent down the road, even while going through these troubling times."

4. Welcome them home

Instead of giving your kids money towards their rent, consider having them move back in with you.

Normally, Henske advises writing up a contract because it gives everyone a coping mechanism and an understanding of when it will end.

However, it's hard to do that right now in the pandemic, which is throwing everything off.

Also, sort out financial parameters, like contributions for rent, food and utilities, and whether you will charge them a flat rate for everything or just ask them to pay for certain items.

"For some people, they may say, 'OK let's imagine we'll do this for six months when they can live for free and then they have to pay rent for four months or five months,'" Henske said.

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Also lay out your expectations about the things that would cause conflict, such as cleaning, cooking and noise.

The biggest mistakes parents make is assuming their kids will move out when ready and letting them wait for the perfect job, Henske noted.

Instead, encourage them to get some other work while they are job hunting, like at a local restaurant, so that they can be a productive member of society.

While no parent wants to watch their kids struggle, adult children need to learn how to not rely on mom and dad. In these trying times, try to strike a balance.

"We all have a hard time coming to grips with our own mortality, but we are not going to be around for our kids forever,"  Sprung said.

"It is very important that we educate them and give them the tools needed to be financially independent with or without us to be there."

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