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Rethinking 65 Feature: Generosity Can Undercut Parents’ Financial Well-being

Retired Couple at StrongBox Wealth

Some parents like being the “family hero,” but advisors warn about the unintended consequences of pampering adult children.

By Ed Prince

Advisors, beware of the “family hero” client.

That’s a retired parent who thrives in the role of benefactor to their children, sometimes to the detriment of their own retirement success, according to Derek Wittjohann, chief operating officer and partner of Premier Path Wealth Partners in New Jersey.

Wittjohann makes the observation in the third annual survey of advisors focused on retirement by Dynasty Financial Partners. One of the 20 survey questions asks advisors if they’ve seen couples providing financial support to children, such as buying houses, and how that has affected their retirement.
Overgenerous parents hurt not only their own finances, they do a disservice to adult children who fail to learn how to manage money themselves, says Wittjohann, whose firm focuses on business owners, corporate professionals, and multi-generational wealth and planning.

“It’s easy for the next generation to calibrate their expectations of the future and their spending to assume the family’s ‘golden goose’ will always be there, only to have the rug pulled out from them when they realize it is not,” he says in a post-survey interview with Rethinking65. Other advisors we spoke with who participated in the Dynasty survey say they agree.

Chuck Cooper III, advisor and managing partner with StrongBox Wealth in Missouri, outlines several scenarios where parents continue to act as benefactors to adult children, some justified, some ill-advised. “It can oftentimes be out of legitimate need, like there’s a medical emergency,” says Cooper, whose clients span the wealth spectrum from mass affluent to ultra-high-net-worth individuals. In some cases, a child has a legitimate need because they cannot help themselves due to a disability or cognitive impairment, he says. 

A “Loan” Becomes a Gift

But in many cases, the adult child asks for a loan for a non-emergency, and the “loan” turns into a gift, Cooper says. Such pleas for handouts amount to an “embedded form of enabling, if not entitlement,” he says.

Wittjohann says that attitude often has been ingrained in children by their generous upbringing. “It’s generally been baked in through a lack of understanding … that it’s to the substantial detriment to their parents’ financial outcomes,” he says, adding that there’s never been a line drawn making it clear that the parents have to stop providing this kind of support.

Geoffrey Schaefer, a wealth advisor with Intergy Private Wealth in Colorado, has a stark warning for parents who want to give generously to their children when they can’t afford to. “If providing financial assistance is truly more important than your own financial independence, the $200,000 gift today will push back your retirement by roughly two years,” Schaeffer says in his survey response. “Is that OK, Mrs. Client?”

For higher net worth clients, it may not make a difference, Schaefer tells Rethinking65. “For many folks though, those decisions directly impact their goals.”
In such cases, an advisor should ask the client to restate their values and then clearly explain to the client the effect the gift would have on their financial situation, he says. “There are some difficult conversations, like, ‘If you really want to make this gift happen, you won’t have as much money later on,’” Schaefer says.

Leaving Children with Stunted Financial Literacy

Wittjohann stresses that the children of a “hero parent” can lack even basic financial knowledge. “We’re working with a client who received financial support from their father for a long period of time,” he says. “The father passed, and they’ve never balanced a checkbook, and they’re having to learn how to pay bills. So, there’s a financial literacy stunting that can happen as a result of that.” 

An adult child’s lack of financial literacy results in “emergencies” that could have been avoided with proper planning, Cooper says. “That can be in the form of a car purchase because the other one went kaput, and they gotta go to work, or paying off high interest credit card loans, or maybe there’s a new air conditioner or home repair. There are these necessities that come up, when in reality, it’s just a fire drill that needs immediate attention because the next gen has not adequately planned with a proper emergency fund,” and has poor spending habits. Cooper says his firm works to educate a client’s children. “Our advisors counsel the next– gen. We’re proactively engaged in the next gen as much as the lead gen wants and allows us to be, to help craft that habit, that discipline … so that you don’t get into these fire drills down the road.”

Playing the Intermediary or the ‘Bad Guy’

Cooper’s firm also acts as an intergenerational intermediary when a child makes a request for a sizable amount of money.
“It’s a very delicate situation, but it’s one that we’re accustomed to talking about,” Cooper says. “It’s usually in those instances when I can highlight why it would be a long-term disadvantage for both the first gen as well as the next gen.” Wittjohann says he’s played the “bad guy” at a family financial conference where he sat across the table from parent and child and informed the child that the parent would have to curb their largesse.
Wittjohann and Cooper both say that in most cases, a child’s unsustainable demands on parents are unthinking, bred over a lifetime of privilege, and not pernicious.

“In our experience, very, very infrequently is there a conscious effort to take money at the expense of their parents,” Wittjohann says. “I can think of one example that was a little uncomfortable,” he says. The son of a client asked the parent for help buying an apartment in New York City. Wittjohann participated in a conversation where he explained that fulfilling the request would be detrimental to the parent. “And the son understood that and kept pushing further. So, it does happen. But thankfully, this seems to be the exception,” he says.

Giving Now Can Be the Right Choice

Although Wittjohann, Cooper and Schaefer all sound the alarm over giving too much to children, Schaefer adds a caveat.
“It’s kind of contradictory,” Schaefer says, “but in the economic environment that we find ourselves in, there’s a big case for giving more rather than waiting until you pass away. Houses are tough to buy. Education is more expensive. There’s no one that probably needs money more than your 35-year-old kids or grandkids,” he says. “If you can do it now, that’s probably going to help them get into that house in San Francisco, versus waiting until you pass away when … it’s probably not even helping them at that point.”

“I love that point,” Wittjohann says after being told of Schaefer’s argument. “In some cases, it’s better to give with a warm hand while they’re still alive rather than a cold hand after their passing.” Although giving to children can be detrimental to parents, in many cases, it makes sense and can be included in a financial plan, Wittjohann says. A parent may have more retirement income than they need, he says, adding, “Let’s be thoughtful about filling that gap with giving to children because they can use it more now than they could later.

In a four-decade career in journalism, Ed Prince has served as an editor with many of New Jersey’s leading newspapers, including the Star-Ledger, Asbury Park Press and Home News Tribune.

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