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Helping Your Adult Children without Hurting Your Retirement

Facing heavy college debt burdens and an unpredictable job market, many young adults today are returning home to live with their parents. In fact, according to a recent study by the Pew Research Center, more than 32 percent of young adults lived with their parents in 2014—more than lived alone or with a spouse or partner.

No matter the reason your adult son or daughter is moving back home—job loss, a failed relationship, or a desire to save money or pay down debt—having a plan to manage the new arrangement is essential. The following questions can help you set expectations and ensure that both you and your child stay on course toward your financial goals:

What are your own needs and priorities?

It's natural to want to support your child in a difficult time, but you need to be realistic. Don't exceed your limits or sabotage your own financial plans. Your child should understand that it's important for you to maintain your own retirement and debt repayment goals and obligations.

Who's paying the bills?

Even if your kids have left your nest, are you feathering their new one? If you're still on the hook for financial support for your young (or not-so-young) adult child, you're not alone. According to a 2014 American Consumer Credit Counseling survey, more than one-third of U.S. households provide regular financial assistance to adult children, including: paying rent, repaying student loan debt and covering car payments and cell phone bills. Even if you haven't dipped into your IRA to pay for your daughter's wedding (and, please, don't do that), these smaller amounts—a couple of thousand or even a few hundred dollars at a time—can have a detrimental effect on your retirement savings if they continue over the long term.

Is it a loan or a gift?

Another element to consider when providing substantial financial support to your child is the annual IRS gifting limit. At what point does your monetary support become taxable? For 2018, couples can gift up to $30,000 before having to report the amount to the IRS. In some instances, the same limit can be applied if you loan the money to your child (e.g., as a down payment on a house) but either consider it interest-free or charge below-market interest. For any amounts over these limits, you'll be on the hook for taxes.

It's important to note that gift and estate tax rules differ from state to state, and each situation is different. So it's crucial to consult with a qualified tax professional about the impact to your tax bill.

Will your child pay rent?

Charging rent can help offset the costs of having another person under your roof. If you don't need rent money to cover your bills, you might consider letting your child save that amount to use when he or she moves out. If your child doesn't have a job or can't afford to pay rent, exchanging work for room and board is an option. Your child's duties might include shoveling snow, mowing the lawn, painting a room, or cooking meals.

What are your child's debt obligations?

Parents are often conflicted about whether to help their children pay off credit card or education debt. If you do decide to help, create a contract that outlines what you expect in return. You could also waive rent for a couple of months if your child agrees to put any savings toward decreasing his or her debt burden.

Does financial support now lead to financial independence later?

As parents, your goals are noble and well intentioned. “I want to give my kids more than I had," or “I want to give them a head start to keep them out of debt," seem like great reasons to help out if you have the means to do so—but do your actions foster the habits that will lead to financial success and independence? Or are they possibly setting the expectation that you'll continue to fund a lifestyle that your children may never be able to afford on their own?

Do they have an exit strategy?

Along with creating a financial plan, setting a move-out deadline will encourage your child to work toward concrete goals. If you don't set a limit, he or she may stay at home longer than expected or delay moving forward with future plans. If your child needs to start paying off debt or wants to save money for a down payment on a house or condo, have a realistic discussion about how long it will take. To help everyone stay on track, some parents draw up a contract that both they and the child sign.

Do you need to reassess the plan?

Once you've made a financial plan and set a move-out date, ensure that your child is making progress toward those goals. Talk regularly about obstacles he or she has encountered and how you may be able to help. If your child hasn't been able to find a job or other circumstances change, you may need to update the plan to reflect a more realistic time frame.

Dealing with a full house again can be tricky, especially if you've lived in an empty nest for an extended period of time. But by setting clear ground rules and financial expectations, you can ensure a much smoother transition when a grown child returns home—and help him or her regain financial independence more quickly. Learning to live within our means can be a challenge at any income bracket, and cutting your kids off financially or enabling bad habits is a tough line to tread. Here are some compromises you might consider:

Set boundaries.

Separate the wants from the needs. It's okay to want to help your kids relieve the stress from crushing student loan debt, but you don't need to finance their vacation or spa visits.

Charge rent.

This seems like an easy place to start, but it can be difficult to determine an amount and stand firm on collecting it; if they can't afford it and end up months behind, your kids won't perceive any impact if they feel like they can owe you indefinitely. Don't necessarily expect market value for the room, but you have the right to set boundaries that keep both parties feeling comfortable with the arrangement.

If not rent, pick an expense and be consistent.

Between utilities, groceries, and other expenses, there are many different ways your adult child can be accountable for at least some household needs.

Help them create a plan.

Help your child build good money habits by working together to set a budget and savings goal. Discuss the amount of financial help you're able to provide without jeopardizing your own savings. Also decide if your child will stay on your health insurance plan (most plans cover kids up to age 26).

Live within your own means.

Lest you want to end up on their doorstep someday when your retirement funds run out, be disciplined about sticking to your budget and savings plan. Above all, make sure you discuss your actual spending needs both as a family and with your financial and tax professionals. You've put time and effort into building a sustainable retirement plan. Don't derail your hard work by giving away more than you can afford.