February 25, 2019 – 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.