Financial advisers are seeing a trend in older baby boomer parents supporting their adult children, even when it means they are taking away from their own financial security.
Don't Let Your Grown Kids Ruin Your Future-The Wall Street Journal
It's the Boomer Boomerang.
Baby boomers, who were notorious for prolonging their own adolescences well into their 20s and beyond ("Seinfeld," anyone?), are feeling the financial sting now that their own offspring have their hands out.
The problem has only grown since the financial crisis, the official recession and the economic doldrums that have swamped the country.
The crux of the matter: The kids are out of work, out of money and maxed out.
But so are Mom and Dad, who have seen their own retirement nest eggs cracked, their retirement incomes shrunk and even the value of their nests—the family home—fall.
And despite those woes, financial advisers are seeing a trend in boomer parents supporting their children, even when it means they are taking away from their own retirement security.
Will Ellis, a financial adviser in La Grange, Ga., tells the story of a 60-something couple driven to the brink of insolvency by their 30-year-old daughter's profligacy.
A real-estate agent during the housing boom, she racked up $850,000 in debt (including on her house, her car and her second home) before the recession hit and her income was slashed by over 80%.
Lucky for her, Mom and Dad were willing to help out—so much that Mr. Ellis figured they would themselves have gone broke in little more than a decade.
"How much are you willing to sacrifice?" Mr. Ellis recalls asking the retired couple. "Are you willing to give up your own needs?"
Mr. Ellis's clients made the tough, and right, call. They cut off their daughter.
But it's not at all certain that most parents would make similar decisions. A survey released last year by TD Ameritrade found that 57% of boomers said they would be willing to support their adult children even if that means it would take away from their own retirement.
Yet even boomers who aren't financially coddling their children are having a hard time making ends meet in retirement. Fifty-five percent of boomers now plan to retire later than they originally expected, according to the survey. And retirees say their biggest regret is not having saved more money for their golden years, according to a study by Hartford Financial Services, a provider of insurance and wealth-management services.
Financial advisers insist that parents shouldn't jeopardize their own futures for the benefit of their grown children.
Here are some steps to take to avoid facing that problem:
- Don't write a blank check. Even if you are willing to help your children out financially, don't make it a free-for-all. Make sure you can pay your bills before promising to cover your kids' expenses.
- Set limits. Tell children what you feel comfortable providing for them and when you will no longer be able to do it. Be clear about what choices you are willing to make down the road in retirement to be able to give to them. Are you willing to work longer? Take fewer vacations?
- Be the grown-up. Too often parents feel guilty saying no to their child—no matter how old they are. You can be honest with them and explain that you're putting your own retirement savings at risk.
- Reassess your goals.If you have been financially supporting your adult children, develop a new plan to get back on track. Figure out what you will need to live on in retirement and stick to it.
- Insist they grow up. It's OK to make children accountable for themselves. If they aren't held accountable they will repeat the same mistakes over again.
- Start young. Educate children about money early, instilling the values of saving and budgeting. The earlier children are involved in making decisions about money the better.
- Don't bankroll everything. The key is to not pick up every tab in their lives or pay every bill. See that they get part-time jobs. It will leave them better suited to go into the work force when they finally do get out on their own.
2) In the Markets today:
Stocks tumbled on Friday after news reports that Standard & Poor's would downgrade credit ratings on several euro-zone countries.
Stocks close lower on euro worries, Chase earns-From USA Today
Stocks ended lower Friday after earnings fell at JPMorgan Chase (JPM), the largest U.S bank, and the Standard & Poor's rating agency downgraded France's top-tier AAA credit rating one .
The Dow Jones industrial average lost 49 points to end the day at 12, 422.28, a decline of 0.4%. The broader Standard & Poor's 500 index fell 6 points, or 0.5%, to close 1,289.12. And the Nasdaq composite declined 14 points, or 0.5%, to end the day at 2,710.67.
It was the first earnings miss for JPMorgan since the final quarter of 2007, a period in which a credit crunch began taking a toll on financial markets. The thinking is that if JPMorgan, widely considered one of the best managed big banks, had trouble in the fourth quarter of 2011, the rest of the industry likely had trouble, too.
It's called the "cockroach theory" on trading desks, says Phil Orlando, chief equity strategist at Federated Investors. "You never see just one cockroach. If you see one, you know there's bound to be a lot more."
Surprisingly strong bond auctions in Spain and Italy on Thursday reinforced hopes that policymakers may be getting a grip on Europe's debt crisis after months of indecision. European and Asian markets mostly rose.
However, the euro slipped to its lowest level in 17 months after reports came out that S&P would follow through on its Dec. 5 warning to cut credit ratings for 15 of 17 European governments that use the euro. It cited higher borrowing costs, even for top-rated nations, and ongoing disagreements among European leaders about how to contain the crisis.
By mid-afternoon in New York, S&P announced it was downgrading France's top-tier AAA credit crating a notch to AA. More downgrades were expected after the markets in New York closed for the week.
The euro dropped 1.3% against the dollar to $1.26. Borrowing costs for Italy and Spain, two countries at the center of the region's debt crisis, increased.
The dollar and U.S. Treasury prices rose as investors moved money into lower-risk assets. The yield on the 10-year U.S. Treasury note fell to 1.84% from 1.93% late Thursday.
The weakness at JPMorgan opened the season for bank earnings on a sour note. Though a pickup in the stream of U.S. earnings may help steer markets over the coming days, Europe's debt crisis is likely to remain the focus.
One bright spot in an otherwise down day on Wall Street: The Thomson-Reuters/University of Michigan preliminary index of consumer sentiment for January rose a stronger-than-expected four points to 74.0 from 69.9 at the end of December.
But investors ignored the signal that consumers are feeling pretty good about the economy after the holiday shopping season. The big focus on Wall Street remained Europe.
3) Top financial story of the day:
Talks between Greece and its creditor banks to slash the country's towering debt pile broke down on Friday, with the Greeks warning of "catastrophic" results if a deal to swap bonds is not reached soon.
Debt talks falter, Greeks warn of disaster-From Reuters
Talks between Greece and its creditor banks to slash the country's towering debt pile broke down on Friday, with the Greeks warning of "catastrophic" results if a deal to swap bonds is not reached soon.
The two sides are divided over the interest rate Greece will end up paying, which determines how much of a hit banks take.
Athens needs an agreement, seeing creditors voluntarily giving up a lot of their promised returns, to reduce its debt to more sustainable levels and convince the European Union and International Monetary Fund to keep lending it cash.
Both sides appeared to be digging in their heels in what analysts said looked like a high stakes poker game in a final attempt to convince private bond holders to take some losses to avoid a disorderly default that could threaten the entire euro zone.
It would come via a swap between old bonds teetering on the brink of default and new ones for which banks would take a big write-down. Without a deal, banks could lose even more and Greece would be threatened with default and possibly euro zone ejection.
"Discussions with Greece and the official sector are paused for reflection," said the Institute of International Finance (IIF), which leads talks for private bond holders.
"Unfortunately, despite the efforts of Greece's leadership, the proposal put forward ... has not produced a constructive consolidated response by all parties."
Greek negotiators earlier warned that failure to reach a deal would be disastrous for Europe.
"Yesterday we were cautious and confident. Today we are less optimistic," said a source close to the Greek task force team in charge of negotiations.
"It is important to remind all parties that the consequences of failure would be catastrophic for Greece and the Greek people, Europe and Europeans," the source said.
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The stumbling block in the negotiations was the low coupon, or interest payment, offered on the new bonds, one source familiar with the matter and one banking source said.
"The main problem was the (European Union and International Monetary Fund's) insistence on a coupon lower than 4 percent on the new bonds," the banking source said.
That could mean an accounting loss of more than 70 percent for banks on their books, far more than the actual 50 percent cut in the original value of the old bonds laid down in the original deal.
Under the terms of the October plan, bondholders would take a 50 percent hit on the notional value of the old bonds. But the actual losses on their books depend on coupon and maturity of the new bonds, and could be far higher.
"When you're dealing with a sovereign, you don't have a huge amount of tricks up your sleeve, because if they choose not to pay you there's not an awful lot you can do," said Gary Jenkins, director of Swordfish Research.
The IIF's Charles Dallara held meetings in Athens on Thursday and Friday and Finance Minister Evangelos Venizelos said talks would most likely resume next Wednesday.
"There is a meeting next week and we'll make every effort to succeed," the source close to the Greek side said.
The IIF said there was a "tentative" plan to meet on Wednesday, but that it depended on events in the next few days.
Time is pressing, as Greece needs a deal to stay afloat when a 14.5 billion euro major bond comes due March 20, and the bond swap paperwork alone will take at least six weeks.
Greek Prime Minister Lucas Papademos said the new aid package and PSI negotiations were interlinked and both needed to succeed for Greece to survive.
"Neither deal can stand on its own. One is a condition for the other," he said in a speech late on Friday. "We are fully aware of how critical the situation is. Until these negotiations are completed, we face dire economic dangers."
EU, IMF and ECB inspectors, who arrive in Athens on Tuesday for talks on a new, 130-billion-euro rescue plan, also want to see a deal on the debt swap before they agree on the bailout.
"We look forward to the resumption of talks between Greece and its creditors. It is important that this lead to a PSI agreement that, together with the efforts of the official sector, ensures debt sustainability," the IMF said in a statement.
Any agreement with private bondholders on debt reduction should be in line with the terms decided by euro zone leaders on October 26, the EU Commission said on Friday.
Under the terms agreed in October, Greek privately held debt would be reduced by half, so that, together with structural reforms, the overall debt to GDP ratio of Greece would fall to a sustainable 120 pct in 2020 from 160 percent now.
A government spokesman said earlier that Greece had not decided yet whether it will submit a law to force creditors into the bond swap, denying a Greek media report that it would do so by Monday.
Three senior euro zone sources told Reuters on Thursday that Athens was mulling such a bill, which would make a debt restructuring binding for all investors once a certain percentage agreed.
Without using so called collective action clauses, the participation rate in any debt swap deal could be smaller than needed because many hedge funds would profit more if Greece defaulted because they would get paid in full from insurance.
"A lot of the (old) bonds have traded and are in the hands of the hedge funds. Do you think the governments are going to (pay out) to hedge funds? No way. So people like us, unless we are forced, we don't have an incentive to accept," said a source at a hedge fund, which owns Greek bonds.
4) Quote of the Day from Dave Ramsey.com:
Most of the important things in the world have been accomplished by people who have kept on trying when there seemed to be no help at all. — Dale Carnegie
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