Bankrolling adult kids imperils boomer retirement

By Liz Skinner

June 24, 2012

Economist Barry Bosworth was surprised to realize how much he and his wife still spend on their two adult sons, long after they put them through college.
 
Although the expenditures are mostly a lot of little things that add up each month, the couple also helped their sons buy homes and cars after they had secured doctorates but were earning low salaries in the early days of their careers.
 
“Children are still our largest expense, well after they leave home,” said Mr. Bosworth, a senior economics fellow at The Brookings Institution.
 
The amount that Americans spend on their adult children during years when they should be concentrating on saving for their own retirement worries some financial professionals.
 
Many parents can't see how paying down their children's debt or making mortgage payments for them could be hurting their own future, advisers said.
 
“Taking care of your adult children is one of those things that you don't expense for,” said Steve Hamant, a financial adviser affiliated with LPL Financial LLC. “I have to make sure that clients understand that money that's flowing out at this point will reduce their retirement.”

For many parents, even when they comprehend that the large checks that they write their kids may reduce their own future income, it is hard to deny them, Mr. Hamant said.
 
In fact, an Ameriprise Financial Inc. survey of 1,006 affluent baby boomers, conducted in December, found that 93% have provided some level of support to their adult children.
 
That rate isn't just a phenomenon that has occurred since the nation's economic recession. In a similar survey conducted in 2007, 92% said that they had helped their adult children.
 
Most of the money parents funnel to adult children is day-to-day spending coming from discretionary cash accounts rather than long-term savings, so the effect this could be having on retirement isn't as obvious, said Suzanna de Baca, vice president of wealth strategies for Ameriprise.
 
“If they aren't taking the money out of a retirement account, they aren't connecting the dots,” she said.
 
The data suggest that parents are helping even more now than in 2007 with paying off loans and covering housing costs.
 
About 71% of baby boomers in the recent survey said that they are helping pay their kids' student loans and 55% said that they have allowed their adult children to move back into their homes and live rent-free. About 53% have helped them buy a car, and nearly half help with car insurance, the study found.
 
At the same time, just 24% of responding boomers said that they are putting away money for the future, down from 44% when the survey was taken five years ago.
 
It is even more of a concern, considering that Americans spend an average of $235,000 to raise a child to 18 and then many help with college, which costs an average of $17,131 a year for an in-state four-year public school and $38,589 annually for a private-college education, according to The College Board.
 
According to advisers, parental support is lasting longer than it used to because of the flailing economy and high unemployment rates.
 
“People are especially sympathetic about helping their children now, given the economy,” said Donald Nicholson Jr., a financial adviser at Donald W. Nicholson & Associates Ltd.

Parents aren't just helping children during their 20s and 30s as they establish careers.
 
Mr. Nicholson said that he has clients whose 40-something children are moving home after getting divorced and needing help getting back on their feet.
 
In addition to threatening retirement income, such financial support can have another negative consequence in families that have more than one child, Ms. de Baca said.
 
Many times providing support to one child and not others who may be taking care of their own finances creates resentment, she said.
 
“One of the biggest problems I hear about involves the inequity of support between children,” Ms. de Baca said.
 
It also is hard for parents to know when enough is enough, and they are hesitant to talk with their kids about becoming more independent.
 
“Parents feel a lot of pressure to continue providing support,” Ms. de Baca said.
 
Mr. Bosworth said that both his sons, now in their 40s, are doing well in academia, and he expects to be spending on grandchildren soon.
 
“I remember advising my sons to make their avocation their vocation, but I think that now I'd tell them that a little bit of money wouldn't hurt either,” he said.

Bought for $881, this LTC policy pays out $1.7M

By Darla Mercado

April 29, 2012

Insurance companies paid some $6.6 billion in LTC insurance benefits to about 200,000 policyholders last year, according to the American Association for Long-Term Care Insurance.
 
The group studied claims data from 10 LTC insurers.
 
While many holders of long-term care insurance complain about high premiums, analysis of claims data reveals that a select group of those covered have paid insurers relatively little for what has turned out to be years of benefit payments.
 
According to the AALTCI, the largest open claim is $1.7 million, belonging to a policyholder who bought her coverage at 43 at the cost of $881 per year.
 
The policyholder filed her claim at 46 and has been receiving benefits for close to 15 years.
 
The second-largest claim belongs to a man who bought his coverage at 45, made his claim close to four years later and has been receiving benefits for more than six years.
 
That policyholder paid $3,374 per year for his LTC insurance, which has paid out $1.2 million in claims.
In one situation, the buyer made her claim only three months after purchasing coverage.
 
That customer, who was 56 when she decided to buy LTC insurance for $4,520 per year, has been receiving benefits for 12 years and five months.
 
In that time, she has rung up $1.12 million in claims.

Often when young insured individuals make claims, it is either due to a debilitating accident or a chronic condition such as Lou Gehrig's disease or multiple sclerosis, said Jesse Slome, executive director of the AALTCI.
 
He added that the study didn't get into details about the specific causes of the largest claims.
 
The AALTCI found that just 10.4% of new individual claims that began last year started before the insured person reached 70.
 
“Long-term-care insurance is not the lottery,” Mr. Slome said.
 
“A policyholder who paid $3,000 in premiums and received benefits exceeding $1.5 million is not a winner,” he said.
 
“But having this protection in place can pay off, and for thousands of Americans, it increasingly [has],” Mr. Slome said.