Dr. Bob, age 55, with an income exceeding $250,000 and a portfolio approaching $400,000, lived with his wife, Claudia, in a lovely community. He was determined to enhance the lifestyle of his daughter, Kelly, and son-in-law, Matt, both age 28. Bob paid a sizeable portion of the down payment for a home in an upscale area for Kelly and Matt. He also paid the mortgage each month.
The arrangement was originally to be an interest-free loan. But Matt spent six years (or was it seven?) in graduate school (funded by his father-in-law) with no income. Then he procured an administrative position that paid only $80,000 annually. Kelly, meanwhile, remained home with the couple’s two children. With the children starting private school and the couple paying one-half the school’s fees, guess who paid the remaining portion? Kelly and Matt had a tough time making ends meet. Therefore, the “loan” continued and, in reality, was forgiven.
According to Kelly, even with the house and school payments, Matt and she would be in serious debt without her father’s help. Living in an “acceptable” neighborhood required more than just a mortgage payment. Kelly and Matt needed to “fit in” in terms of their clothing, choice of school for their children, landscaping, home furnishings, autos, etc.
In fact, in the last year, Kelly and Matt made the following purchases:
- A $3,000 watch
- More than $20,000 for clothing, not counting clothing for their children
- $10,000 for dues/fees at the local country club
- Enough goods purchased on credit to generate $5,000 in payable interest
- Cash gifts of more than $20,000 per year by Dr. Bob made this possible.
But that’s not all! New vehicles were needed. Kelly was used to “foreign luxury.” How were Kelly and Matt able to own these vehicles? They purchased a new vehicle every three years. How? Every three years, Dr. Bob gave his daughter stock from his non-growing retirement portfolio. Many adult children invest such gifts; many, such as Matt and Kelly, do not. Instead, they buy cars.
Was Dr. Bob a wimp? Apparently not.
The preceding example typifies those illustrated in The Millionaire Next Door, written by T. Stanley and W. Danko, PhDs. The example was modified to reflect a dental flavor.
The phenomenon in this example, labeled “economic outpatient care” by the authors, is widespread. Many Americans, especially professionals, feel compelled to provide financial support to their adult children and grandchildren. What is the result?
According to the book by Stanley and Danko, “Those parents that provide certain forms of EOC have significantly less wealth than those parents within the same age, income, and occupation whose children are economically independent. And in general, the more dollars adult children receive, the fewer they accumulate, while those given fewer dollars accumulate more.”
Many children of professionals are playing the role of high-profile, successful upper-middle class folks. Yet the appearance is a façade, perpetuated well into the children’s middle-age years.
Who is responsible for this behavior? Let’s look at the characteristics of this economic assistance and where it leads, according to Stanley and Danko:
- “Giving precipitates more consumption in children than saving and investing.” Not only are gifts of cars, housing, and schooling provided, but also the other “necessities” of living in an upscale neighborhood, such as furniture, personal accessories, and electronic equipment.
- “Gift receivers have significantly more credit debt and invest less money than nonreceivers.” This continues the need for higher and higher levels of assistance as the family grows, and as neighborhood peer pressure mounts.
In a January 2006 study entitled “The New Retirement Mindscape,” conducted by Ameriprise Financial, 2,000 people ages 45 to 70 were polled. The study revealed that the top financial concern of those planning retirement, such as Dr. Bob in our example, was “advice to help our children become more financially savvy.” This came before “help sorting through health care and social service options,” and “help to make sense of Social Security and employer pensions.”
Dr. Bob would have liked to consider retirement in 10 years or less. He was not funding his retirement plan at all, and was becoming more and more agitated with decreased hopes of retirement since he was bound in the clutches of the financial desires of his adult children, to whom he was now contributing the equivalent of the annual budget of Kazakhstan.
Dr. Bob “called in sick” to his accountant, did not return his financial planner’s calls, and felt enormous pressure at the office to produce more dentistry. The dream of reducing his work schedule to four days a week, with several extended vacations during the year, faded. He also became more nervous anytime Kelly wanted to talk “privately.”
What were Kelly’s main concerns?
- Her parents’ estate being heavily taxed
- Not getting her children into acceptable colleges
- Any reduction in her standard of living
- Not receiving her fair share of her parents’ inheritance
As Stanley and Danko reported, “Gift receivers never fully distinguish between their wealth and the wealth of the gift-giving parents.” Instead, they are waiting for their parents to die since inheritance is the biggest potential gift of all.
Dr. Bob and Claudia subsequently noted that the success of their children’s lives was a reflection of how good a job they did, and not how the children performed. The money the couple spent was “for the things we may not have had time to do, that may have made a difference.”
This shows conviction that any financial shortcoming on Matt and Kelly’s part is the parents’ fault, making Dr. Bob and Claudia vulnerable to continued emotional and financial extortion.
The book When Parents Love Too Much points out that parents who give too much do so out of their own needs, not their children’s. They give out of unmet desires of self-esteem, love, or attention. They give to change their adult children’s behavior, or to replace the emptiness inside them.
Dr. Bob and Claudia were on a guilt trip. How did they escape this dilemma?
The turning point occurred when Dr. Bob had a minor myocardial infarction. Although he missed a small amount of time at the office, the warning was heeded. He and Claudia discussed their personal and practice finances and said: “With Dr. Bob’s future earning capacity in doubt, we simply could not afford to aid Matt and Kelly any more. We didn’t want to be in a position in which we would be dependent on the kids — that is every parent’s worst nightmare.”
The couple had a long talk with Matt and Kelly soon after Dr. Bob’s recovery. Their plan included:
- The house loan would be forgiven. This money would be deducted from what would be left in the estate, if anything remained. (As a note, besides Kelly, Dr. Bob and Claudia have another daughter who refuses any assistance.) Matt and Kelly would phase in mortgage payments during a three-year period.
- Stock gifts would cease so Matt and Kelly would need to purchase their autos.
- Private schooling would be subsidized for the current year only.
- Cash gifts would be scaled back to zero during a three-year period.
- Both Dr. Bob and Claudia did not relent from their plan. They realized that possible future medical complications to either of them could subvert Matt and Kelly’s financial future with the current structure, so it was time for the adult children to bear responsibility.
During the next two to three years, Kelly responded with immense resentment to the plan. She did not talk much to her mom and dad. Kelly did find part-time employment at a local dental office, and realized the value and nurturing that Dr. Bob brought to the patients in his practice.
Meanwhile, Matt blossomed. He was promoted twice in three years, and was able to afford the home mortgage. Matt and Kelly now own a four-year-old pickup and a seven-year-old BMW.
Upon reflection, Dr. Bob and Claudia offered some poignant thoughts. “We realized that, eventually, with our deaths — if nothing else — the gifting would cease. Also, not providing the kids a chance to own their future was a huge disservice.” The couple asked, “Did our parents ever give or loan money or gifts to us? How did we feel when we paid it back, or did not pay it back? Could we live with Matt and Kelly having a different future than the one we imagined?”
The example presented in this article demonstrates an increasingly alarming problem for “baby boomers” who are intent upon financial security in their later years. In my retirement seminars, this issue appears with 25 to 50 percent of the audience. A quick read of Chapter 5 of The Millionaire Next Door may help.