Helping Your Children and Grandchildren Financially
While this may be necessary and even admirable in some circumstances, it can also have a detrimental effect on the retirement finances of parents and grandparents. In the study, 34 percent of respondents said that helping their adult children and grandchildren financially has slowed down their own retirement savings.
Walking a Fine Line
It’s a fine line between knowing when and how to help adult children financially and when not to. On the one hand, millions of Americans have lost their jobs since the recession began through no fault of their own, and millions more are under-employed, earning far less than they did in their pre-recession jobs. Countless others are facing financial emergencies due to unexpected large medical bills or home foreclosures.
However, some adult children in dire financial straits have mostly themselves to blame for their situation. For example, many Americans lived the “good life” back during the boom times, when it seemed like the stock market and home values only went in one direction—up. Many of them leveraged themselves to the hilt, racking up thousands of dollars in debt on high-interest credit cards and taking out large home-equity loans that are now causing a financial strain.
So how do you know when to help out financially (assuming you even can) and when to practice some “tough love” and let your adult children face the consequences of their own financial choices?
Experts say that it starts with having an open, honest, heart-to-heart conversation with your adult children about their financial situation. This conversation won’t be easy, but you need to have a good understanding of exactly what they’re facing financially (and why) before you can decide to what degree you can (and should) help out.
Making Planning Provisions
Given all of this, it could be wise to make provisions in your financial planning now for the possibility that you may have to provide financial support for your adult children and grandchildren later during your retirement years. This might mean putting more money away in your retirement account each month, striving to earn a higher return on your retirement investments, or perhaps even delaying your retirement in order to continue building your portfolio.
The one thing many experts say that retirees and near-retirees should not do is jeopardize their own retirement security when providing financial help to their adult children. As much as you may want to help your children and grandchildren, your own financial independence should be your first priority—so you don’t have to turn back to them for financial help at some point in the future.
Some experts also recommend formalizing financial arrangements with adult children, perhaps by setting terms and putting them down in writing. Some websites (like LoanBack.com) even have tools that can help you arrange intra-family loans.
Of course, financial assistance doesn’t have to be in the form of a loan—you can also make outright gifts to your children and grandchildren. If so, familiarize yourself with federal gift tax rules that limit how much can be given to family members without tax consequences. In 2012, you can give up $13,000 to each of your children and grandchildren without triggering the federal gift tax.