Keith Hewson, a 29-year-old airline pilot, hadn't planned to live with his in-laws after he got married. But he quickly realized that sharing a three-bedroom Houston townhouse with his wife's parents, who offered to let them live there rent free, would allow him and his wife, Katy, to pay off their student loans and credit card debt and save for a house of their own.
"Everything we were putting into [rent] is now paying off bills and going toward savings. That was a huge selling point," Hewson says. He estimates the arrangement saves him and his wife, a social worker, around $1,500 a month.
Hewson is part of a generation that is benefiting from the generosity of its parents, who are approaching retirement or already retired. Almost 4 in 10 adults age 60 or older give money to their adult children, while only about 12 percent get financial help from their kids, according to the Pew Research Center.
Trends. High housing prices, the rising cost of higher education, and the relative affluence of the older generation are among the factors driving the trend, which experts expect to become more pronounced as more baby boomers enter their golden years over the next two decades.
"As a historian, I can tell you no older generation in history has ever spent so many resources on grown kids," says Stephanie Coontz, director of research for the Council on Contemporary Families.
Indeed, the annual cost of a public four-year college has more than doubled over the past 20 years (as measured in constant dollars), and housing prices over the same period have more than tripled on average (while the value of a dollar has less than doubled). That has provided more wealth to boomer homeowners while at the same time making it harder for their kids to buy first homes.
"It's just more and more important for kids to get this kind of help," Coontz says, noting that families unable to give cash often provide non-monetary help, such as offering to baby-sit their grandchildren or allowing adult children to move in with them.
William LeFavor, 24, a financial planner in Wellesley, Mass., lives rent free at his parents' home 50 miles away, which has allowed him to save about $25,000 for a down payment on a house. In addition to providing housing, his parents pay for his food, dry cleaning, and other living expenses. (He also enjoys his mother's cooking.) Without his parents' help, LeFavor estimates that rent would eat up at least half of his roughly $27,000 annual take-home pay, and after food and a social life, "you're just going into debt."
But depending on retired parents can also create family tension. "It's embarrassing," says Sharon Davey, a single mother of two young daughters in Merrimack, N.H. Since her divorce about four years ago, she has been relying on her mother's help. "It makes me feel like a little kid, and I'm 46 years old.... Obviously, I'm extremely thankful and appreciate that she helped me when I don't know what I would have done, but it's a hard pill to swallow."
Her mother, Lucy Olson, 71, has paid for Davey's mortgage, car note, and groceries. Olson, who lives primarily off her Social Security income of about $1,100 per month, says that while she wants to help her daughter, who lost her job in July, she doesn't know how much longer she can keep doing so. She has already cut back on having her hair cut and colored and buying things for herself.
Trish Lynch, a certified credit counselor for ClearPoint Financial Solutions, says she often works with parents who overextend themselves financially when a son or daughter is in need. "Parents feel like it's their responsibility to keep on helping an adult child financially," Lynch says. "Not only does it make it financially unstable for the parent, but it creates poor habits for the adult child."
Self-preservation. When considering making loans or gifts, experts warn that parents should first protect themselves from financial distress. "It's fairly common that [we] see clients who want to start making gifts, and then, as they look into it further, they realize maybe they're not in a position to start making them," says Marianne Kayan, an estate-planning attorney in Bethesda, Md.
An Ameriprise Financial survey found that many baby boomers didn't realize how much the help they were providing was cutting into their own retirement savings. About 30 percent of baby boomers said the money they gave to their adult children negatively affected their own retirement savings, but most were unaware of the impact it was having. "People psychologically didn't get that connection...[that] 'if I weren't bailing out my kid, then I could be adequately funding my own retirement,' " says Craig Brimhall, vice president of retirement wealth strategies for Ameriprise.
As for fostering bad habits in adult children, Eileen Gallo, a psychotherapist and coauthor of The Financially Intelligent Parent, recommends that parents ask themselves if giving money makes an adult child more or less independent. Her husband and coauthor, Jon Gallo, warns that dependence can breed tension: "If you continue to have to be rescued by your parents, you start to resent your parents."
Spell it out. If parents do decide to give money, the Gallos recommend discussing the details in advance, including whether the money comes with any strings attached. For example, if money is earmarked for a car, can it be any type of car? If the money is a loan, when does it need to be repaid, and at what interest rate? (If the rate is below the one set monthly by the IRS, it may need to be treated as a gift, which can have different tax implications. Each parent is allowed to give a child up to $12,000 a year before it is subject to gift tax.)
New companies, such as Virgin Money (formerly CircleLending), allow family members as well as friends to lend each other money through a more formal arrangement, which includes automatic monthly payments and deposits.
Nancy Flint, a semiretired dentist in Oaklyn, N.J., chose to lend her son, Stephen Martin, $405,000 so he could buy a home in Jersey City, N.J. She says she did it to help him as well as diversify her investments. She receives $2,500 a month in payments on the loan, which carries a 6 percent interest rate.
Martin, a technology consultant, also benefited: He estimates that he avoided around $15,000 in fees, such as private mortgage insurance and loan origination charges, which he would have faced had he gone through a bank.
Parents may want to consider the example they're setting. Frank Furstenberg, professor of sociology at the University of Pennsylvania, says young adults today may watch their parents providing so much support for so long—and be wary of becoming parents themselves. And that, of course, would be very bad news for boomers who aspire to become grandparents.