Can you save your retirement by giving less to your kids

There are certain ‘motherhood’ statements, so-called because you would find it hard to disagree with these sentiments. One such statement is that we all want what’s best for our kids. We’d walk over hot coals for them, in fact. This is evidenced financially by the supercharged growth of the Bank of Mum and Dad (BoMaD), to the extent that it is now the ninth largest lending entity in Australia extending a sizeable $35 billion collectively in loans.

But behind all this love and largesse, there can also be a lot of grief invested in lending money to adult children.

I was recently alerted to an article about this, penned by an American financial expert, Dan Veto, Financial support of adult children and your retirement, which made me question whether Australian retirees, too, are sacrificing their income because they find it difficult to refuse a request for funds from their grown-up children.

This can be a hard topic to discuss. One reason is that we can all suffer from financial guilt, usually associated with spending too much or not saving enough. This applies also to intergenerational loans. Often our gut will tell us we shouldn’t hand over more money but for a myriad of reasons, we can’t seem to refuse a request when it comes from our offspring. That’s why I find Dan Veto’s thoughts so useful. He identifies and examines the rational aspects of inter-family loans and offers a way of viewing your own situation calmly. Using Mr Veto’s process, here’s an ‘Australian’ take on the vexed issue of saving your retirement by lending less to your kids!

The main aspect of any propensity to lend or give money to adult children is to try to understand if it is fair to both parties with some kind of plan to terminate this loan at some stage – or if it is support on drip-feed.

Years ago I saw some Australian research on how much the BoMaD had reduced economic prosperity for retirees, with a significant 20% or so of respondents reporting that it had. That research will have been overtaken by more recent economic factors, so the percentage could well have changed. I’m not a betting person, but my strong feeling is that the proportion with more adverse retirement prospects will now be higher still. Dan Veto quotes US research suggesting seven of 10 parents of adult children have provided financial support and 20% indicating that the impact on their financial goals was significant.

What does this mean for you?

So assuming parents are alike all over the globe, and those with the access to money are highly likely to share it with their children, how do you review your own money relationship with your offspring?

There are seven key types of financial support, according to Veto’s article. Thinking about which of these types of support fits your situation can be useful. As with any type of loan or debt, the funds can be used in a way that invests in future wealth. Or this money can be consumed with little to show for it. Here are the seven categories of loans:

  • True financial dependence (when a child is not able to provide for themselves for reasons of disability or similar) 
  • Recovery Safety Net (to cover a period of financial loss or shock)
  • Investment in the future (education, skills upgrade, professional development)
  • Building a financial foundation (loan for property purchase, free board to save for same)
  • Living beyond their means (Could be a wide variety of supports for items such as cars, more expensive apartment, holidays etc.)
  • Inertia (continuing to pay for items covered when adult child was at home)
  • Personal benefit or influence (holidays, things you feel are good for your adult son or daughter)

This list is fairly self-explanatory, but let’s dwell on the last item. It’s very useful to consider whether your ongoing support is to assist your offspring, or for you to retain influence over their decisions. This is tough and embarrassing to admit, but better to know if that is the case. There’s an interesting quote by Montessori which says, ‘Everything you do for me, you take away from me.’ Worth thinking about if you are trying to foster resilience and independence?

How is your income likely to hold up?

By now you may have a clearer idea of the reasons behind your family lending. And a clarification as to whether these reasons are valid or simply a bad habit.

Stage two of your review of your own branch of BoMaD is to assess the impact this might be having on your retirement preparedness. This will be in one of three ways:

  • Detrimental (every dollar of support means a dollar less for your own retirement)
  • Neutral (providing benefits results in no net loss)
  • Beneficial (Providing support such as a spare room but receiving board and family company is a win for both generations)

These three categories will help you to better understand the cost of your support. And keeping a spreadsheet which is updated by both parties means this true cost is clear to both the lender and the borrower.

Ending financial help

This then brings us to the ‘pointy’ part of the discussion. How will you end this support in order to use all your funds for your own future? Again, Veto offers three talking points:

  • No termination trigger – agreement by default that this situation will drift on
  • Time-based termination – deadlines are set and can be extended by mutual agreement
  • Situation-based termination – when a degree is achieved, a house purchased, a goal met, financial support can be withdrawn.

You will need to stay aware of the bottom line of that spreadsheet. Measuring the impact of financial support is so important. The extent of money loaned or gifted may surprise you. That’s important also, as you may never have planned to be party to ‘drip-feed’ support and you need to know how much this has cost in order to make a rational decision about what you need to do.

Two other points that matter. One is that you attempt to treat all your children equally and fairly. This is often easier said than done, but it’s easy to encourage sibling rancour if you don’t. And finally, financial elder abuse is alive and well. So much so, it’s a topic for another day, but if you feel bullied or coerced into making or continuing a loan, then that has to be challenged. 

Traps for BoMaDs

Centrelink loans and gifting rules often mean you are deemed to earn income on money you don’t have (i.e. it’s in your ‘ hands). This can seriously affect your Age Pension eligibility so understanding these rules is vital. A chat with one of our consultants can help you sort this out. 

Moving money outside the super environment also attracts penalties. Understanding more about your Super is a consultation designed to help you with such financial decision-making.

What do you think? 

Is it a joy to be able to help your adult children? Have you done so without any major concerns? Or have you experienced a negative ‘return’ on your loan?