Your retirement finances can be a lot more fragile than you might think. A budget can be disrupted by many things, and some parents have a hard time dealing with one expense in particular: They can’t say no to their grown children.
Helping your children isn’t necessarily a problem if you have the financial resources to do so. But some parents continue to bail out their children, even if it puts their retirement savings and lifestyle in jeopardy. “Unfortunately, adult children are one of the most dangerous [threats] to a successful financial plan,” says Cary Guffey, a certified financial planner at PNC Investments in Birmingham, Alabama.
Many Americans have not saved enough for a comfortable retirement. For example, a survey by the Employee Benefit Research Institute found that the majority of Americans have saved less than $100,000for retirement and about a quarter have saved less than $1,000. “Unfortunately, far too many people will be living almost exclusively on Social Security or working longer than they anticipated because Social Security payments will not be enough to make ends meet,” says Lynnette Khalfani-Cox, a personal finance coach and author. “The problem is compounded not only because people are failing to save, but a lot are helping their kids and grandkids.”
Baby boomers with financially independent adult children who don’t support anyone else are twice as likely to be retired, according a survey of 5,500 U.S. households by the market research firm Hearts & Wallets. Only 21 percent of boomers who support adult children are fully retired, compared to 50 percent of boomers who don’t support children or other extended family members. Boomers who support adult children are also more likely to report financial anxiety.
For parents in a never-ending cycle of providing financial assistance to their children or grandchildren, here’s how to avoid shouldering that burden.
Just say no. You don’t have to provide assistance to your adult children every time they ask for it. “The first and hardest lesson and the obvious thing is you have to learn to say no,” Khalfani-Cox says. “At the very least, if you cannot say no, establish the proper financial boundaries.”
There’s nothing wrong with parents wanting to sacrifice for their children, but when they continue that mindset after the kids reach 25, 35 or even 45, it can impose a significant burden on your ability to retire. You are “enabling your adult children to turn to you as a financial plan B or backup plan. That’s a huge problem,” Khalfani-Cox says.
Too much financial support could even be preventing your grown children from becoming self-sufficient. “Often there has been a pattern of financial entitlement, where adult children or grandchildren have not learned to live responsibly and stand on their own two feet,” Khalfani-Cox says. “The parent is helping and enabling just as much as the kid is asking.”
Make a legal agreement. Elijah Kovar, co-founder of Great Waters Financial in Richfield, Minnesota, had a client who wanted to buy a home for her son because his credit history prevented him from renting an apartment. “I told her if you do this, you are taking a risk and it has to be one that will not ruin your relationship with your son if he defaults and you have to kick him out,” Kovar says. “His credit shows he doesn’t hold up his end of the bargain.”
Kovar says people might be less likely to repay family members than they are a bank. One option is to act like a bank and have a lawyer draw up official paperwork. You can put dates when payments are due in the contract.
Consider the gift tax exclusion. Up to $15,000 can be given away in 2018 that’s free from any federal gift tax consequences. But don’t pass along that much cash if you think your child will squander it. “Just because it’s there doesn’t mean you have to use it,” Guffey says. “Don’t deny your children their scars. They need to fall down and scrape their knee.” Gifting cash can make sense, but how you give the money can make a difference. “We don’t want our children or grandchildren to be dependent,” Guffey says. “It’s using that gift as a tool for education rather than bailing them out.”
Make your financial advisor the bad guy. Many planners and advisors say they don’t mind if their clients lay the blame on them. Kovar says he’s had serious conversations with clients to warn them that continuing to give their children money will jeopardize their financial future. “One client’s son has mooched off her for years,” Kovar says. “I told her to tell her son that your financial advisor says you can’t do that anymore, or you will run out of money. Using your financial advisor is a good out.”
Before you lend to your child’s new business, get a second opinion. Some children ask for money from parents to help start a business. “You want to help your children and see them grow and develop, but most of us get into facts as our children tell them. It’s a half-baked vetting process,” says Jeff Speight, a certified financial planner and wealth advisor at Tanglewood Total Wealth Management in Houston. “If you give money to your child, you have to assume you are not going to get it back.”
Get an opinion from someone not involved in the business. If you still want to loan your child money, set expectations. Agree to a certain dollar amount and set a sunset provision. “The child knows its [repayable in] 18 months, and when it’s over you might consider an extension, but you’ve got to have guardrails,” Speight says. You don’t want a $20,000 investment to turn into $30,000 and then more. “You can end up bleeding the [retirement] account dry,” Speight says. Don’t give tens of thousands of dollars to your children when you barely have enough money to get to retirement.
“When people are on the plane, the flight attendant will always tell you that, in the event of an emergency, put on your own oxygen mask first, then help the person next to you. The idea is if you pass out or are physically incapable of breathing or staying alert, you will not be any good to anybody else,” Khalfani-Cox says. “The same is true of retirement. If you don’t properly plan for your post-working years, you will not be good to anybody else. If you deplete your resources, who will help you?”