5 Ways Your Family Could Ruin Your Retirement

This story originally appeared on NewRetirement.

Saving for retirement can be an incredibly difficult task, especially when your path is filled with hurdles such as job loss, rising inflation, and debt. One obstacle you may not think about is your own family.

Juggling family commitments makes it hard for many adults to save for their own financial future. It can force many to continue working long past their planned retirement age. And as more young people graduate with student debt and struggle to afford rising home prices — and the older generation lives longer — the problem is likely to intensify.

So let’s take a look at five reasons why your family is one of the biggest risks to your retirement security and how you can continue to honor your commitments without jeopardizing your own financial future.

1. Paying for Your Child’s College Education

Parents don’t like to think of their children as an expense. But kids are expensive, especially if you intend to cover their college education. According to the College Board, from 1989-90 to 2019-20, average tuition and fees tripled at public four-year and more than doubled at public two-year and private nonprofit four-year institutions, after adjusting for inflation.

Many parents prioritize their child’s education over saving for retirement. While the motivation to help your child graduate from college debt-free comes from a positive place, remember that college savings for your child should not be your top financial priority. Saving for retirement should come first.

The fact is, there are many options for students that need help paying for college: taking out low-interest loans, earning scholarships, and work-study programs.

Neglecting your own retirement saving can hurt your children financially in the long run. What happens when you need to leave the workforce early due to illness or injury and don’t have enough savings to fund your retirement? You could wind up needing financial support from your children just as they’re becoming financially independent.

2. Supporting Adult Children

The high cost of higher education isn’t the only threat to your retirement. In fact, according to an analysis by NerdWallet, a majority of parents are paying for at least some of their adult children’s expenses, and it could be costing them up to $227,000 in retirement savings.

NerdWallet found that 80% of parents of adult children are covering, or have covered, at least a portion of their adult child’s expenses after the child turned 18.

Of course, helping launch your kids into adulthood is part of being a parent. But if the launch takes a few years longer than planned, it can have significant consequences later on.

To illustrate, say you’re paying $60 per month for Junior’s cellphone for five years after he leaves home, after which you have 22 years left until your retirement. According to NerdWallet’s calculator, that $60 per month can end up costing you approximately $14,625.70 in retirement savings (assuming a 6% annual return on investments and annual compounding).

But of course, many parents are paying more than $60 per month. Some adult children have never moved out from their parents’ house, and others are “boomerang” kids who moved back in with their parents after going out on their own at least once.

If you’re having a hard time retiring the financial support of your adult children, it’s time to have some honest conversation about financial independence — both theirs and yours. Consider writing out a contract that states the length of time you’re willing to support an adult child while they look for a job and save up some money to go out on their own.

And let your child know why you must limit your financial support. It may seem obvious to you that your financial resources are finite, but it may not have occurred to your child.

3. Becoming a Caregiver for Your Parents

There’s a reason people in their 30s and 40s are referred to as the “Sandwich Generation.” Even while you’re helping your kids through college and into a career, you may be responsible for caregiving or covering the long-term care expenses of your own parents.

According to Merrill Lynch’s 2017 report, The Journey of Caregiving, 40 million Americans are currently serving as caregivers to family or friends. When we think about caregivers, providing assistance with daily chores and personal care often comes to mind, but 68% also contribute directly towards the recipient’s expenses, with an average of $7,000 per year.

But the real cost of being a caregiver is not always apparent. Paying for medical and living expenses for an elderly parent is easy to tally, but some caregivers also leave work to fulfill their caregiving responsibilities.

What can you do to reduce the impact of caring for an aging parent on your retirement savings?

First, have a discussion with your parents about their long-term plans, including long-term care insurance, purchasing an annuity to provide income, considering a reverse mortgage, or coordinating other benefits. You could even sit down with them and go through a retirement planning exercise with a good retirement calculator.

These discussions can be difficult, but it’s much better to be proactive about planning while your parents are still in good health rather than scrambling once care is needed.

4. A Collapsing Family Businesses

Does the family business make up the bulk of your retirement plan? That’s actually a pretty common scenario for small business owners today. A recent survey by Paychex found that only 30% of small-business owners felt confident they will be financially ready to retire at some point.

But there are several hurdles to using a closely-held business as a retirement plan. First, there’s the question of how much the business is worth. Even a business that brings in a healthy income for its owner may not be worth much to a third-party if the business’ success relies heavily on the knowledge, experience, or reputation of the owner.

Next, if you own a partial stake in a family business, you’re trusting that other family members won’t do anything to jeopardize your plans.

Counting on a family business to fund your retirement is a risky approach. If the business fails, the fact that the fault is not on your shoulders doesn’t change the fact that your wealth goes away with it.

If you’re scrimping on retirement savings to put earnings back into growing your business, consider diversifying your retirement plan. Even small investments into a SEP IRA or a solo 401(k) can help reduce your tax bill now and grow tax-deferred until you need the money in retirement.

Remember, in the long run, you need to prioritize saving for retirement ahead of paying your adult kids’ way in the world, covering a family member’s long-term care, or investing in the family business. It doesn’t make you a bad family member; it just makes you realistic.

There are many financial advisers who specialize in retirement needs specific to small-business owners.

5. Elder Financial Abuse

Elder financial abuse is the unauthorized or improper use of resources of an elder family member or friend, who is 65 years or older, for monetary or personal benefit, profit, or gain.

It spans a broad spectrum of fraud, including taking money or property, forging an older person’s signature, and getting an older person to sign a deed, will, or power of attorney through deception, coercion, or undue influence.

A study by Allianz Life Insurance Company of North America found that of the respondents who reported experiencing financial abuse, 52% indicated that the crime was committed by a family member, friend, or caregiver compared with 22% who said a stranger was the perpetrator. And, these percentages probably under-report the problem since many families do not want to admit that a family member was involved.

If you want to protect yourself from fraud by people you know, consider these tips:

• Resist pressure: Try not to feel pressured to help friends or family when it is outside your financial means — even if you wish you could be of assistance.
• Monitor: Monitor all of your accounts carefully and make sure you know what all charges and debits are.
• Seek assistance: Do not sign any documents you do not fully understand. And, consider talking over such matters with an attorney, financial adviser, or another family member.
• Get arrangements in writing: Sometimes seniors want to offer financial assistance to a loved one in the form of a loan. It is important, however, that this is a formal arrangement, not a verbal agreement. You can work with an attorney to get the details of the financial transaction in writing — to protect yourself as well as the family member you are assisting.
• Restrict access to information: You should be especially careful with all financial paperwork and passwords inside of your home. It is important to really control access to your financial information.
• Background check: If you have hired someone to help in your home, be sure that they have been properly background-checked.