Increasing age of dependency: A challenge to retirement planning
In recent years, a noticeable shift in young adults’ residential patterning has emerged. More and more people in their 20s, and even 30s, are choosing or being compelled to stay in their parents’ homes for an extended period compared to previous generations. Parents, in their retirement phase, could feel the financial burden of this situation, making retirement a thornier issue than ever before.
Now, the question that begs an answer is, “why has this trend impelled, and what effect is it having on retirement planning?”
Correlation between economic factors and prolonged stay at parents’ homes
By and large, this trend owes its existence to several economic factors. These include an unstable job market, increasing cost of living, and soaring education costs and student loans that accompany it. In the face of these economic complexities, young adults are either choosing or, in worst-case scenarios, compelled to resort to their homes to save money and pay down their debts.
A study from the Pew Research Center, a nonpartisan think tank, reveals that the percentage of young adults ages 18–34, living at home with their parents, has dramatically risen over the years. In fact, the percentage has reached its highest level in 75 years.
This changing social norm is not solely restricted to the United States. It is a global trend affecting developed countries such as the UK, Canada, and Australia, and the impacts on parents, especially those in the retirement phase, are significant.
The impact of this extended dependency on retirement planning
While the extended stay of children provides emotional support and a family bonding experience, it also significantly affects the financial planning of parents, especially concerning retirement.
Additional expenditures like groceries, utility bills, and perhaps health insurance for the young adults, can eat into retirement savings. Moreover, support might extend beyond direct living costs. Parents could find themselves aiding their adult children with major financial milestones like buying a car, handling student loans, wedding expenses, or even helping with a down-payment for a home. As gratifying as it can be to help out your children, these sizable one-off expenses can considerably deplete retirement savings.
This issue is further compounded by other financial challenges that today’s retirees are facing. These include finite defined-benefit pension plans (more businesses are doing away with these in favor of defined-contribution plans), low-interest rates yielding less from savings, longer life expectancy meaning that savings must last longer, and escalating healthcare costs.
Is there a scope of finding a solution?
Indeed, the financial burden that parents bear when adult children live at home longer can be significant. However, with mindful financial planning, the situation can be managed to ensure little to significantly less impact on the retirement savings.
A great place to start could be around the dinner table, having a candid conversation about finances and expectations. Parents often make the mistake of not discussing the financial impacts of their children living at home. It’s vital to confront this issue head-on. Parents should discuss the cost involved and establish a financial contribution from their working adult children, even if it’s small.
Teach them financial independence
Parents can also seize the opportunity to instill financial responsibility in their young adult children. By involving them in household expenditures, mortgage conversations, and other related financial discussions, not only does it alleviate parents’ financial burden, but it also equips the younger generation with the tools they need to eventually transition to financial independence.
Consider A retirement or financial advisor
If the situation is straining retirement savings, don’t hesitate to involve a financial advisor. An expert opinion can offer valuable insights and help put together a comprehensive financial plan accommodating the current situation while aiming to safeguard retirement savings for the future.
Tweak the retirement plan
Generally, retirement plans are devised considering the immediate family—spouse and children. However, with adult children residing for extended periods, this plan requires tweaking to accommodate the lingering financial obligations. Thus, parents should be more conservative with their expenditure estimates and try to plan for higher costs of living.
Strengthen the retirement savings
One way to protect your retirement from becoming a casualty of this situation is by prioritizing and strengthening retirement savings. A retirement account like 401(k) or an Individual Retirement Account (IRA) can play a crucial role. Making maximum contributions should be a goal every year.
Adopt an early savings approach
One of the best things parents can do is to inculcate a savings attitude in their kids early on. Encourage them to save part of their pocket money, or earnings from summer jobs, right from their teenage years. This not only imparts a lifelong habit of saving money but can also eventually help them manage their own college costs or other significant expenses, reducing their dependency on their parents for financial support.
In conclusion
Progressive changes in society have rendered the prolonged stay of adult children at their parents’ home a globally recognized phenomenon. While this transition presents numerous challenges for parents planning their retirement, effective processes can be adopted to manage these obstacles. Combining financial education for adult children, consultation with financial advisors, and a revision of retirement plans, parents can effectively navigate this modern-age financial challenge and safeguard their retirement savings.
