For retirement plan participants with adult children who have returned home—so-called boomerang kids—Roth options can help.
Many parents with adult children share a complication in their retirement preparations: boomerang kids, or adult children who have returned to the family home.
The 2022 Thrivent Boomerang Kids Survey found that 40% of parents surveyed reported having an adult child who is currently living at home, and 26% had an adult child who was temporarily living with them but has moved back out. At the height of the COVID-19 pandemic in 2020, the trend was worse: 52% of young adults (18- to 29-year-olds) moved in with their parents, according to analysis by Pew Research Center.
While kids moving back home isn’t “necessarily a new phenomenon,” the challenge to parents’ retirement is “exacerbated” by the rising cost of living and larger amounts of savings that are needed for retirement as individuals live longer, says Devin Joyce, financial planner at Prudential. Another reason, he says, is that fewer workers have a pension that provides lifetime income for participants.
“For the most part, a lot of clients are really struggling with retirement readiness without a boomerang kid,” Joyce says. “The death of the pension plan has had such a profound impact on most Americans and their retirement readiness because most people can’t reasonably figure out how much their retirement savings will correlate [to] in terms of actual income in retirement.”
The Thrivent survey found that 35% of parents with boomerang kids have sacrificed their savings dedicated to long-term goals such as retirement or housing, and 26% of parents are unable to pay off debt or save for short-term goals because they are supporting an adult child.
For parents, the expense of a boomerang kid complicates their retirement planning, as they want to balance allocating resources to help their child while also maintaining current savings levels. In 2022, increased gas prices—which have lowered in recent months after rising sharply—have added to these challenges, Joyce says.
He counsels clients that they would be wise to remain invested in the market and not lessen their retirement savings contributions in order to capitalize on future investment growth.
“Reducing your retirement savings, if you have concerns about the market is maybe the worst thing you could do because you’re getting an opportunity to buy at a lower cost but counter-intuitively people still make that decision,” Joyce says. When working with clients on planning for retirement, Joyce sees the effect of boomerang kids in parents who take early retirement account withdrawals, hardship withdrawals, 401(k) loans and “a lot of home equity lines of credit” to help their child financially or to pay for graduate school, he says.
“What we’re actually seeing right now is that clients are not able to save quite as much for their retirement, mainly because they might even be spending a lot of that money at the gas pump,” Joyce says. “Add to that a kid that needs a little support, whether it’s helping them get out of debt or pay some of their student loan payments back. It’s having a real impact on parents.”
Boomerang kids can disrupt their parents’ planning for retirement, but these parents can take proactive steps to mitigate the effect and keep their retirement plans on track, Joyce says.
“The question that I ask clients a lot is, ‘Would you rather tax the seed or tax the tree?’ Many clients are putting money into their pre-tax 401(k) plan, and later the whole tree is going to be taxed,” he says. “By putting money in Roth, you tax the seed going in, but the tree is all tax-free in the future.”
Plan sponsors and retirement plan advisers can help parents in this predicament by ensuring they are aware of every investment option available to them. Roth contributions are a way to pay taxes now on the money you invest so you can enjoy a tax break later. It’s a way to tap funds at the lowest possible tax penalty and with as minimal a disruption to their retirement as possible, Joyce says.
“For most Americans, their tax-qualified retirement money is pre-tax money, which means that it’s all going to be taxed on distribution, but any money that they’ve allocated to Roth—whether it’s Roth 401(k) or Roth IRA—they can actually take a distribution on that tax-free as long as the money has been in the account for five years or longer,” Joyce advises.
Per the IRS rules, workers who are 59.5 years old can withdraw funds from a Roth 401(k) tax-free, and for Individual Retirement Accounts individuals can withdraw the amount they contributed.
“Even the investment gains [are tax-free]; it is the secret sauce of retirement plans,” Joyce says. “That might be a great place to look to make a withdrawal, provide support, but not create more taxes for yourself and impact your own retirement situation.”
He adds, “We are all going to be in a higher-tax environment once the [Tax Cuts and Jobs Act of 2017] expires starting in 2026, so at least for the next four years until 2026, while we’re in a historically lower-tax environment, it makes more sense to pay your taxes now and contribute to Roth so that you never have to pay taxes ever again.”
Despite the myriad retirement savings and financial challenges for affected parents, many are not taking the opportunity to discuss money and finances with their boomerang kids. The Thrivent survey found that 70% of parents aren’t discussing money management or setting financial expectations with their adult children.
Joyce says he advises clients to broach sensitive financial topics as a family.
“One of the things that I encourage parents to do is to get their children involved in their own financial planning process,” he says. “For a lot of parents, there’s this stigma around talking about money, especially to their children, and I think the more that you can let the kids behind the curtain, let them see your actual financial situation, the less likely they are to take advantage of your financial support.”
The Thrivent survey found a disconnect between what boomerang kids think their parents’ financial challenges are and what they actually are. Among young adults who live at home, 72% said their parents are financially prepared to support them, whereas only 21% of parents said they could provide full financial support to their adult child if the child had to move back in with them.
“The other thing that getting the kids involved in your financial planning does is it gives them a sense for clarifying their objectives so that they can start to create some priorities for what they want to do with their money,” Joyce says.
Data from the 2022 Thrivent Boomerang Kids Survey comes from a Morning Consult survey conducted between April 30 and May 3 of this year. The survey was completed by 2,200 adults.
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