What is multigenerational living and how does it impact us financially?
When we hear the term multigenerational living, all it means is more than one generation of adults in a family living under one roof. Now, as everyone gets ready to celebrate the Fourth with friends and family, some of our listeners might think to themselves that they could never live with their parents, or with their children and grandchildren, but it is a trend that is on the rise, for a number of reasons. And with more people making something like a Declaration of Codependence, I think it is important to highlight the reasons we are seeing this trend, and to talk about some of the financial benefits, and risks, of such an arrangement.
What is driving this trend?
Well, the numbers are quite clear. For the first time since the early 20th century, more young Americans between 18 and 34 live with their parents than with a partner in their own household. Just under a third (32%) of millennials now live in their parents’ home, according to analysis from Pew that was published last week and based on Census data.
So what is causing this decline? Well the data tells us that the last time there were similar numbers was around the Great Depression, so we can infer that a key driver of this trend is economic circumstances. Even as the job market has picked up in recent years, many millennials are having difficulty paying off student loans and securing the same financial success that their parents’ generation did. But there is another reason here too: many older Americans have not saved enough for retirement, so we are also seeing co-habitation as more parents move in with their children as well.
Is this trend consistent for all Americans?
The increases we are seeing in terms of multi-generational households are across the board, but they have not traditionally been as common among some groups as others. For example, Hispanic and Asian families that have one or more generations who are recent immigrants are more likely to choose a multigenerational living situation than their American-born counterparts. And Black Americans are 10 percent more likely to be living with multiple generations of family.
What are the pros and cons for families financially?
Obviously, the biggest benefits tend to come from sharing the costs, with housing being the big one. Regardless of whether it is an adult child moving back in, or a parent coming to live with you in retirement, the ability to split the mortgage payment or rent between more people is helpful, and can be beneficial if it allows family members to improve their financial situation. The same is true of utilities and other common costs.
However, the downsides can be very bad if they take root. For example, if there is not a clear plan that everyone sticks to, it is always possible that this arrangement can strain one party’s resources if the other party is not holding up their end of the bargain. Whether that is an adult child not paying rent on time, or at all, or an older parent not being clear about the resources they can contribute, this can damage someone’s financial health for a variety of reasons. It could mean less is being contributed to a retirement plan, or worse, mortgage or rent payments, or utility bills not being paid on time, which can severely damage credit histories.
What advice would you give someone who is considering, or is already, living in a multigenerational household?
There are 3 critical steps you should take to ensure that you and your family benefit from such an arrangement rather than getting hurt. First, everyone has to be on the same page. You and your family need to agree about who contributes what to the household. Whether adult children or parents, all parties need to make a contribution if they can, and that should be worked out before they move in. This also means being open about what each person can and cannot handle, financially.
Second, draw up an agreement that everyone signs. While you love your family, and you trust them enough to live with them, there has to be a set of rules that everyone formally agrees to. That could very well mean a lease, or a formalized budget, but make sure you write it down and make everyone commit to it. That way, everyone involved knows where they stand.
Finally, remember to prioritize your financial health first, especially if you are the main breadwinner or responsible for your home. One of the best ways I have heard this said was that it is like the announcement you hear on airplanes: make sure to put your oxygen mask on before assisting others. If your family living situation is jeopardizing your own financial health, then it is not worth it, and you need to consider other scenarios.
Mellody is President of Ariel investments, a Chicago-based money management firm that serves individual investors and retirement plans through its no-load mutual funds and separate accounts. Additionally, she is a regular financial contributor and analyst for CBS News and CBS.com.