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  • Posts Tagged ‘Children’

    Be Smart When Giving Money to Kids

    Thursday, February 25th, 2016

    A cracked egg with money flying out the window.

     

    New research suggests that younger generations are increasingly relying on their parents and grandparents financially, and while it might seem like instinct to open up your wallet to your children or grandchildren, doing so without paying attention to how it might affect your retirement can cause financial trouble down the road.

    A recent study by Ameriprise Financial of adults in the baby boomer generation (in other words, those who are likely to have recently retired or are about to) found that a large majority (93%) provided financial support to their children.  This could include things like helping them pay for college (71%) or helping them buy a car (53%), but many also admit to helping fund unnecessary luxuries.

    While it may feel selfish to not share your money with your kids and grandkids, keep in mind the many years you worked to save for your retirement. It is important to be smart and cautious about how much you give, so that your generosity doesn’t affect your ability to live the lifestyle you need to be happy and healthy during retirement.

    Be Selective About How You Give

    There’s a big difference between dipping into your retirement savings to pay your son or daughter’s medical bills versus funding their move to a fancier new apartment.  Ask yourself if the money will go towards something they really need and if will help them be financially independent in the future. If the answer to both of those questions is no, it is probably best to not provide a monetary handout. The fact that your grandchild wants the coolest new video game isn’t enough—a new version will be out in a year.

    If you determine that the need is big enough to dip into your retirement savings, make sure that the gift will not push you above your safe withdrawal rate—defined by Kiplinger’s as “the annual spending amount that gives your portfolio good odds of lasting a lifetime”. Think about what you’re willing to give up in order to write that check. When something is framed not as what you are giving, but rather as what you are giving up, it is less likely that it will seem worth it.

    It is also a good idea to make direct payments whenever possible. Rather than writing a check that is meant to be used for school, pay the school directly. Making direct payments prevents the possibility that your child or grandchild will misuse the funds. Furthermore, if you pay medical or tuition bills directly, the money is not considered a taxable gift by the IRS.

    If you decide to offer your child a loan, create a promissory note, set a strict repayment schedule, and charge an interest rate. If you do not do these things, the IRS might consider the loan a gift, and determine that it has to be taxed as such.

    Find Ways to Help Beyond the Checkbook

    If you take an honest look at your finances and decide that you can’t give monetarily, think about how else you can help. There are many alternatives beyond writing a check. If your kid or grandkid is having trouble paying rent, offer to have them live at home (but still pay their share of the utilities). Offer to babysit while they work extra shifts at work, or help them in their job search. If managing money is an issue, help your kids or grandkids create a budget and find ways to adjust their spending.  This will not only help them in the short-term but you will also be helping them develop an important life skill.

    The internet is filled with stories of parents who gave too much money to their kids and ended up bankrupt, struggling or having to sell their home during retirement. An outcome like that is not beneficial to anyone, and a little monetary gift in the present isn’t worth the long-term hit it can cause to retirement security. All to say: be smart and careful about how you give.

    The Kids Are All Right. But How Are You?

    Monday, August 25th, 2014
    Summer is winding down, and it’s often a time of change. Each year, many of us watch as our children go off to school and college. This change is big, not only for the kids, but also for the parents.  In addition to the emotional aspects and changes to the daily family routine, it can also mean a big change for your family finances as well.

     

    For the past several years, Sallie Mae has put out a study, “How America Pays for College,” to examine the decisions and funding sources that go into paying for a child’s college education in the United States. The 2013 report  found that average costs of college in 2012-2013 was $21,178. Parents paid 27% of that cost, close to $6,000.

     

    The difference between what you have saved for your kid’s college, and what it actually costs, can be large. This gap can lead parents to make some poor financial decisions. For example, this year’s Sallie Mae report found that one out of 10 parents said they are planning to tap into their retirement funds to help pay for the cost of college. While this may solve the immediate problem, it could lead to many more problems down the road if you have to turn to your kids to help support you in retirement.

     

    If your child has just graduated from high school or college, you may be sighing with relief because she has found a job, and you can start putting the money you were giving to her directly into your savings and retirement accounts. But, if your child is like 36% of 18 to 31 year olds in the US, she is still living at home, and likely unemployed.

     

    With these realities, it can be tough to continue to save for retirement.  But it is important to keep saving.  Start by keeping the basics in mind, set moderate goals, and work to achieve them.  Here are three steps and ideas:

     

    1. Saving a little is a big step! Start saving today, with whatever amount you can. Putting small amounts away for many years will add up.  Work on putting 10-15% of your income into your retirement account every month. That is a large goal, and one you can build up to. You can also help yourself by helping your children. Get them started on saving now, so they will ask less from you later. WISER has 5 saving tips for young people that can get you started.

     

    2. Find creative ways to reduce everyday expenses. Get a small notebook and Piggy Banktrack everything you spend money on for 3 months. Then identify patterns that you can change. For example, if you see that you buy two cups of coffee every day, only buy one, and put the money you were using for the second up into your retirement savings. Other ways to reduce your expenses might include driving less and walking more, or taking more public transportation. Remember to utilize public resources, such as your local library, where you can check out movies, tools, and books for free, and your local recreation center, where you can often swim or exercise much more cheaply than at private, membership facilities. Take a look at some of our previous blogs on budgeting to help you find ways to cut expenses.

     

    3. Plan to work longer. Retirement age isn’t what it used to be; people now live longer and are healthier longer. Put off retirement a little longer so that you can continue to save money for an extra few years. If you can, wait to start collecting Social Security after age 65, not before, in order to maximize your Social Security benefits. Learn more about how your benefits can increase.

     

    Wanting to help your kids financially is noble, but it comes with trade-offs.  You don’t want to support them financially to the detriment of your own retirement savings. The 2013 Sallie Mae report found that the largest source of college funding actually came from grants and scholarships. So make sure to look into all the different funding sources that are available for college, and make your retirement account off limits.  If you want more information about how much money different colleges will cost, check out the Consumer Financial Protection Bureau’s Paying for College  website, which has lots of information and handy guides to help you better understand your options.

    WISER

    About Us

    WISER is a nonprofit organization that works to help women, educators and policymakers understand the important issues surrounding women's retirement income. WISER creates a variety of consumer publications including fact sheets, booklets and a quarterly newsletter that explain in easy-to-understand language the complex issues surrounding Social Security, divorce, pay equity, pensions, savings and investments, banking, home-ownership, long-term care and disability insurance.

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