Support Your Children Without Draining Your Retirement
With the rising cost of living in Canada, many parents are providing ongoing financial support to their adult children. More than 1 in 3 first-time homebuyers in Ontario are receiving six-figure gifts for a down payment. While no one wants to see their child struggle, some parents give so much that their retirement is at risk.
I recently answered a reader question about this in the Global News Money123 newsletter. The question asked about helping an adult child who is struggling with debt. The concerned parent wanted to know if it would be wise to give their son a loan or if it might jeopardize their retirement.
Whether to help a struggling child or to help them get ahead in life, there has been an increased desire to pass on wealth before death.
In this article, we'll look at the motivation for providing financial support to adult children and how to make the most of your gift.
Giving With a Warm Hand
Instead of waiting to leave a big inheritance, more retirees are passing on wealth to their children and grandchildren while living.
There are two main benefits of doing so:
Receiving money in someone's 20s and 30s is often more meaningful than receiving it at older ages.
By making gifts while alive, parents can see the positive effects of their gifts.
This is one of the main ideas in the book 'Die With Zero' by Bill Perkins. He argues that the traditional way of passing on wealth upon death results in what he calls the "three Rs", which is giving:
Random amounts of money
at a Random time
to Random people (you may outlive some of your intended heirs)
A well-time financial gift can be life-changing. Many young Canadians are putting parenthood on pause because of the high cost of housing and childcare. Help with a house downpayment or repaying student loans can open up options for your children that may otherwise be out of reach.
Conversely, a traditional inheritance received in one's 50s or 60s is unlikely to change the course of one's life. It might make early retirement possible, but by then many important decisions about family and career are in the past.
While there are benefits to passing on money early, it doesn't always turn out positive.
Potential Downside of Financial Assistance
On the other hand, financially supporting your kids could make them less self-sufficient. Thomas J. Stanley, the author of 'The Millionaire Next Door' found evidence that regularly giving money to adult children can create dependency and reduce their motivation to manage money effectively.
If your financial support goes towards funding an unsustainable lifestyle, you could end up doing more harm than good in the long run.
3 Steps to Successful Financial Support
1. Find Out What You Can Afford
The first step to successful gifting is to find out how much you can give without sacrificing your retirement. Remaining independent is the goal of almost 100 percent of older Canadians. Providing too much financial support now could lead to running out of money later in retirement.
Maintaining your financial independence isn't only a benefit for you. It is also the gift of not needing support from your children later on. As those in the 'sandwich generation' can attest, supporting aging parents while also raising kids is a big stressor.
Before providing financial aid to your children, answer these questions about your own finances:
What do you expect your expenses to be in retirement?
How will your spending needs change due to inflation?
How much income will you have from lifetime sources such as government benefits, pensions, and annuities?
How much cash flow will you be able to create from investments?
Will you be able to manage unexpected expenses in retirement?
With a retirement income plan, you can be confident that the support you're providing is affordable. It is also easier to set boundaries if helping would put your financial security at risk.
2. Lay the Groundwork for Support
Money is a tool. Like all tools, knowledge is needed to use it well.
Financial literacy is the skills and knowledge to make good decisions with money.
Providing financial support alone is like giving your kids a car without a map. They can get moving, but without financial literacy, they might not like where they end up.
Parents are important role models for kids to learn how to handle money. Regular conversations about money help transmit knowledge and values to the next generation.
Fortunately, you don't have to be a financial expert to pass on important lessons. We've all made mistakes with money in the past and sharing your experiences can be invaluable. If you're starting to learn about money in anticipation of retirement, you can share what you've learned.
If you don't feel qualified to teach your kids about personal finance you may want to hire the help of a professional. An advice-only financial planner can help your child create their own financial plan. This can set them in a good direction early and increase the chance that your financial support will help them get ahead in life.
3. Set Clear Expectations
One of the biggest challenges of financial planning is dealing with uncertainty. We don't know how the stock market will perform, how long we will live, or when we might get hit with a big unexpected expense.
Setting clear expectations is the gift of not adding more uncertainty to your child's life. If they know how much the gift will be and how long it will last, they will be able to plan accordingly.
Define the purpose of the financial help and establish clear terms. This includes the amount given, how long it will last, and any expectations of repayment. If the gift is in the form of a loan, it is especially important to write the terms out on paper.
If you have other children, be transparent about the assistance you are providing to avoid any feelings of unfairness or resentment.
How to Stop Financial Support
If you've realized that the financial support you're providing is more than you can afford, you'll need a plan to bring it to an end. Clear communication and giving your child advance notice will help them adjust to the change. The more support you've been providing, the longer it may take them to prepare.
Conclusion
Helping your adult children with money can be both rewarding and challenging. It's important to balance your generosity with your own financial security. By planning carefully, communicating openly, and setting clear limits, you can ensure your support is a true gift to your children.
