Empty nests may fill up again

But what happens when adult children return home, or ask for financial assistance?

Parents faced with such situations are not alone.

According to the National Credit Union Administration, nearly 4 million people between the ages of 25 and 34 live with their parents.

As a parent, your first instinct may be to help your children out. Before you loosen your purse strings too much, though, ask yourself if you are helping empower your children to build – or rebuild – their financial independence.

When you decide to help your children, and particularly, when you allow them to retun home, there may be some effects on your lifestyle and financial well-being. You’ve worked hard to build a nest egg that you expect to support your retirement lifestyle.

One of your challenges will be to help your child without damaging your own financial security by depleting assets you’ve earmarked for retirement.

For example, if you had planned to maximize your 401(k) and your individual retirement account contributions this year, you shouldn’t change your plans to help your children with their financial problems. You may lose potential investment returns that these contributions can provide during the next few years.

Issues

As your empty nest fills up again, there are some issues you should consider:

• Dealing with rent, room and board. Part of your “contract” with your children needs to be a negotiated amount of rent or room and board. You should consider adjusting the amount according to your child’s income level and make it meaningful, yet realistic.

You can treat the payment truly as rent, or you can use it to create a savings account for your child.

If you choose to use it as a rent payment, you will need to report that income for tax purposes.

If you choose to treat it as the child’s money, you can begin to create a nest egg for your child that you can give back to them as they venture back out on their own.

• Establishing spending boundaries. Another important step in order for this to be a successful arrangement is to discuss a budget and acceptable expenses for the child who has returned home or has borrowed money.

You should discuss what expenses you are willing to cover, and which ones are your child’s responsibility. You should encourage your child to save any extra money instead of spending it on extras such as weekend activities.

• Managing debt. Many adult children return home because they’re unable to afford living expenses, groceries and student loan payments. As part of the budget you create, set aside an amount for debt repayments. You may be able to match a portion of their debt repayment if you choose to do so.

• Helping your adult child develop solid money-management skills.

Teaching your child about the benefits of managing money well and developing sound financial skills is vital.

Teach them how to track and control spending, live on a budget, handle credit properly and save systematically.

The most important thing to remember if your adult child returns home is to negotiate openly and set the expectations, behaviors and financial arrangements at the beginning.

This will reduce family friction and help prevent conflicts in the future.

Timothy M. Reese is senior vice president-investments with A.G. Edwards & Sons Inc. He can be reached at timothy.reese@agedwards.com.