When Keith Hewson was a newlywed, he and his wife, Katy, decided to share a three-bedroom Houston townhouse with his wife's parents, Cindy and Gary Smith. That was four years ago, and today they're still living together. That's because each couple decided they not only benefit financially from the arrangement, but they also enjoy living together. Now that the Hewsons have a baby, the Smiths serve as built-in babysitters and all-around helpers. And the savings generated allow the Smiths to travel more and live more luxuriously than they would otherwise.
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The Hewsons and Smiths represent the growing trend of intergenerational living. Consulting firm Twentysomething Inc. reports that 85 percent of young adults now move back home with their parents after graduation. (According to the Network on Transitions to Adulthood, fewer than 60 percent of 18-to-24-year-olds lived at home five years ago.) The sluggish economy, as well as the fact that today's twentysomethings are so emotionally close to their parents, appear to contribute to that shift.
"It's just more and more important for kids to get this kind of help," says Stephanie Coontz, director of research for the Council on Contemporary Families, noting that families unable to give cash often provide non-monetary help, such as offering to babysit their grandchildren or allowing adult children to move in with them.
William LeFavor, 24, a financial planner in Wellesley, Mass., lived rent-free at his parents' home 50 miles away, which allowed him to save about $25,000 for a down payment on his first house. In addition to providing housing, his parents paid for his food, dry cleaning, and other living expenses. (He also enjoyed his mother's cooking.) Without his parents' help, LeFavor says that rent would have eaten up at least half of his roughly $27,000 annual take-home pay, making it impossible to funnel away any significant savings.
But depending on retired parents can also create family tension. "It's embarrassing," says Sharon Davey, a single mother of two who relied on her mother's help after getting divorced. "It makes me feel like a little kid," she says.
So what can parents (and grown children) do to ease the transition to a multigenerational household? Here are five ideas from experts:
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1. Be a little selfish. 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.
2. Embrace independence. Eileen Gallo, a psychotherapist and co-author of The Financially Intelligent Parent, recommends that parents ask themselves if giving money makes an adult child more or less independent. Her husband and co-author, 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."
3. Spell it out. If parents 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.) Websites such as asaneapproach.com offer templates to help parents and children communicate about the details of their arrangements.
4. Make sure help goes both ways. As much as the Smiths helped the Hewsons by paying the mortgage in their first home together, they never felt like they were being taken advantage of, because they also came out ahead financially. That's because the Smiths handled all of the utilities, including cable, gas, and electric bills. That meant the Smiths could delay tapping into their retirement funds, while still affording regular cruises around the world. Plus, whenever they did decide to travel, they had built-in babysitters for their dog.
5. Know when to say goodbye. For the Hewsons and Smiths, that day might never come. But for William LeFavor, it made sense to move out after he could afford to buy his own house. Says his father, Phil LeFavor, a retired high school vice principal, "We said, 'You can stay as long as you've got a plan.'"
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