While boomers may feel a sense of desire or obligation to pay for their children’s higher education, they do so at their own risk, says Cathy Pareto, founder of Cathy Pareto and Associates in Miami.
“A lot of parents feel like they owe some level of education to their children,” Pareto told AdvisorOne on Wednesday. Unfortunately, she says, several factors have arisen that force boomers to choose between their children’s education and their own retirements.
“Education has gotten so expensive in the last decade or so,” Pareto said, that paying college expenses puts a “direct negative damper on retirement.” Furthermore, the market climate has impacted portfolios in a negative way, and boomers can’t look forward to the kinds of returns they may have become accustomed to in the past.
“Those factors make it difficult to sustain the mindset or commitment to supporting their children’s education,” Pareto said.
An Ameriprise Financial report in April said more than 70% of boomers help their kids pay for college, while 93% said they’ve provided some kind of financial support to their adult children. Boomers who insist on helping their children have to accept the consequences, Pareto said, whether that means they have to continue working or change their lifestyle in retirement.
Pareto (left) noted, though, that just because they shouldn’t pay for college, doesn’t mean boomers can’t help their kids in an emergency.
“A medical emergency is a different situation,” Pareto said. “They don’t have a lot of choice.” When their kids are hit with unemployment, however, boomers should be selective in how they support them.
“They need to lay down rules and create expectations,” Pareto said. Boomers should talk to their kids about a time line for when they should be back on their feet. Parents should also discuss opportunities that they can help their children take through their own professional connections. “Parents need to be allies for their kids,” Pareto said.
“The bottom line is one of the greatest gifts we can give our kids is a sense of self-reliance. We have to teach them the skill sets to survive in the future.”
While some boomers may find themselves in the comfortable position of being able to afford college and retirement, Pareto said it doesn’t happen often. “Some boomers who are more than adequately funded for retirement and have a minimal possibility of failure can afford to help their children. I would argue many more are not in that category,” she said.
“2008 and 2009 were quite sobering for advisors and their clients,” Pareto said. Now, boomers’ feelings that they should help their children finish school with no debt are unrealistic. “They’re far behind in their own plans, and have to figure out how to make the puzzle work with everyone.”
That includes sitting down and having an honest discussion with their children about money and what is expected of them, Pareto said. In some cases, that means children will have to support themselves, either by beginning their education at a community college, working a part-time job or taking on some student loans, she suggested.
“I hate to see people sabotage their own security because of this obligation,” she said.
In her own practice, Pareto has seen boomers thinking about these issues. “I started getting random calls from prospective clients,” she said. Her own clients started asking about supporting their children in other ventures like starting a business.
“It’s hard for parents, especially boomers, to say no to their kids,” she said. “The next generation, many of them have a sense of entitlement, and it’s the parents' fault.”
For advisors who are working with clients intent on providing for their adult children’s education, “It boils down to crunching the numbers and showing the impact on their retirement,” Pareto suggested. “If they’re willing to accept it, so be it.”
An important fact that is often overlooked is that “there are options for students,” Pareto said. There aren’t always options for retirees.”
And even if boomers’ kids do have to put themselves through school, Pareto wonders if that’s a bad thing. “I see a lot of value in struggle,” she said. “If they get everything handed to them on a silver platter, they’re going to have a difficult time in the real world.”