Let’s talk about that provocative New York Magazine article today that has financial folks aflutter and evaluate its thesis that “parent money” is supporting a growing number of young city dwellers' expensive lifestyles.
Better yet, let’s talk to some financial advisors about it.
The article, in case it has not hit your inbox or LinkedIn scroll yet (don’t worry, it will), shines a spotlight on the increasing number of young New Yorkers living well beyond their means in a city where it takes an extraordinary amount of means to live well. The way they are pulling this feat off, according to the article’s admittedly non-scientific study, is through so-called “parent money” filling the financial gaps.
Says the article: "If you know someone under 50 who’s living like it’s the ’90s — who owns their apartment, who’s out every night, or who sends their kid to private nursery school and still has money left for vacation — it’s safe to assume there’s a baby boomer behind them. More than at any other time in New York’s history, parent money shapes our culture."
The article goes on to hypothesize that the so-called "Great Wealth Transfer" we keep hearing about, or that $124 trillion mostly held by the nation’s richest 2 percent, is already fully in motion. And especially in cities like New York, home to more than 360,000 millionaires, and, as a result, a lot of inheritors too.
And those younger generations are going to need it too, if they opt to live in a city where the average rent is over $5,000 a month, studio apartments sell for more than half a million dollars, and full-time day-care tuition runs over $40,000 a year.
“If the boomer parents are still alive, they tend to give in bits and pieces: Monthly deposits in a bank account, a paid-off credit card, a vacation, a therapy bill, a tuition payment, a no-interest loan. The boomers keeping the city afloat aren’t all Tisches and Zwirners. Some were teachers, dentists, and city employees who benefited from cheap housing, a strong market, and maybe even a pension,” the article states.
It goes on to say that many of those getting parent money won’t look rich either.
“If you believe that being middle class means owning a modest home, they will look middle class — until you find out how much that home costs,” the New York Magazine article read.
When confronted with the question of “parent money” and its pros and cons, Steve Parrish, professor of practice and retirement planning at The American College of Financial Services points out that affluent baby boomers are the first generation to largely have their wealth concentrated in 401(k)s instead of traditional pensions. In other words, they have retirement capital rather than retirement income, and that has led these baby boomers to separate into two camps.
“One group is worried about not having enough in retirement, and they are holding tight to their purse strings. They are underspending. The other camp is sitting on seven-figure 401(k) and investment balances and are spending freely – perhaps too freely. And adult children are often the beneficiaries of this inflated sense of boomer wealth. Parents look at all the opportunities and benefits they’ve enjoyed and want to see their children and grandchildren enjoy the same,” Parrish said.
He added that these boomers may even feel a sense of guilt about how well they had things in their working years compared to what their children are facing.
“In one case I’m aware of an adult child has been constantly needling her parents about how good they had it when they were her age – and how bad things are now. This has conveniently led to significant ongoing checks from mom and dad. It only takes a reminder or two of what eggs cost currently versus the good old days, and the checks continue,” Parrish said.
The big risks associated with “parent money,” according to Parrish, are increasing life expectancies along with the spiraling costs for long-term health care. So, when the tables turn, and the boomers need to receive support from their kids instead of providing it, the kids’ lifestyle may get in the way.
“The parents depleted their retirement capital to fund the children, and now the kids don’t have the means to reciprocate,” Parrish said.
The article also rings true to Homer Smith, private wealth advisor at Konvergent Wealth Partners, who said he is seeing an increase in the interest to do more gifting now, particularly around the purchase of homes. In fact, he recently had a family provide significant financing for their three kids to purchase homes near them in California.
“With young families, they had been priced out of the market and were considering moving out of state to buy homes and wanted to keep them closer,” Smith said, adding that the major benefit that these families are seeing is that they can see the rewards of this gifting while they are alive.
The biggest risk, on the other hand, is that their kids become too attached to the money and become dependent on it where they don’t appreciate the money and perhaps don’t take responsibility for their own well-being, Smith said.
“They end up living their lives as ‘waiters’ … waiting for their parents to die so they get the rest of it!” Smith said.
Elsewhere, David Winslow, managing director at Choreo, is witnessing this trend of "parent money" being used to help children start a business or buy a house, especially in metro markets where housing prices have dramatically escalated.
“I have also seen parents funding trusts for the next generation that will create significant lifetime wealth and parents funding 529 plans for their grandchildren because of rising tuition and associated costs of higher education,” Winslow said.
Finally, Jonathan Foster, president and CEO of Angeles Wealth Management, also acknowledges there are positives and negatives in “funneling cash down-generation.” The positives are a lessening of federal and state estate tax liability, and the psychological benefit of happy children and grandchildren living a comfortable and safe lifestyle.
The negatives, according to Foster, are the potential for over-gifting and then mom and dad running out of money, and creating spoiled and entitled children. His advice to parents is to remember that it is not the kids’ money until they say it is so.
“You have the absolute right to leave them nothing in life or in death, and they should know this. You also want to encourage productivity, not entitlement,” Foster said. “However, the earning of money is not the litmus test. It’s productivity.”
“In my family I have three adult children all of whom live in expensive cities: a lawyer, a jazz musician, and a graduate student. All are industrious and successful in their own ways. During my lifetime, my wife and I might support them differently, but upon my death, they will benefit equally,” Foster said.
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