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?
If I was to gamble my money and choose an overseas holiday or spend it on alcohol or cigarettes Centrelink does not care but the moment I help my children with their house mortgages the restrictions are put in and maybe no pension. Is this fair
Anna is right on the money there and I agree with her entirely.
Also there is the vexed question of treating all your children equally. That can mean an even bigger drain on retirement finances.
I have found that any amounts given are soon forgotten or used up quickly by the children’s spouses.
Thanks for sharing John – food for thought indeed! warmest, Kaye
I am in this situation. My son (40) and family was evicted from his accomodation at the time I was getting my rental property ready for sale. I couldn’t say no to my son, and also I couldn’t charge him and his family market rent, so he pays what it costs me (I have owned this rental for over 30 years). All good, but I also fuly support my wife (yes, she has super and savings but wont spend a cent in bills, rates etc and never has).
So to continue supporting myself and wife, I will need extra funds as we age.
What to do? Go without a comfortable retirement? Tell my son the find somewhere else to live? As they say “Yeah, right!”….
The issue is that my son and family now don’t HAVE to find money for a home of their own. His partner started out contributing but now has slipped and doesn’t contribute as much. They go on holidays etc (which I can’t afford) because they find they have extra money at the end of the month.
There is no ” demand” for their money, so it’s frittered away on seemingly unimportant things.
I use this as an illustration of the general “what’s wrong with that generation” arguement we hear so frequently.
And, I wonder what cash-cow the lending institutions will invent now they have milked Mum and Dad’s nestegg dry?
Bank of inheritance? Now there’s a minefield!
This is a tough situation Jethro – the holiday situation seems particularly unfair. do you think it is worth booking a time to discuss and share your feelings? That you wish to introduce (albeit late) a few ground rules? I realise this may seem hard to manage, but going without holidays is a bit punishing? warmest Kaye
Hi Jethro, I think the best thing your wife could do with her super is to open a pension fund if she is eligible and draw down the minimum required percentage to help with your cashflow.
As you probably know when super is converted to an allocated pension there is not tax on the investment earnings!
Hi Bruce, thank you for joining the conversation! Whilst we really appreciate our readers sharing their thoughts, feedback and suggestions with one another we would just like to point out that they are just thoughts, feedback and suggestions. None of the comments posted by our readers or ourselves should be taken as direct advice as there are always many variables to consider. If specific advice is what you seek then you should definitely engage with a qualified financial planner either through us or externally.
Back in 2008 my adult daughter was living well beyond her means. to save her from being declared bankrupt, by the banks. I loaded her a considerable amount of money $145,000.00, (I refinanced my home) on her promises to repay monthly. this arrangement worked for several years until one day she sent me a TEXT message saying that she would be stopping those repayments because she wanted to buy a property suitable for her horses. In excess of $85,000.00 is still outstanding we have not spoken since that TEXT message (2018). The problem with the Bank of Mum and Dad, is that it doesn’t have a default clause. My daughter has not leant a thing about money management and by me loaning her the funds I have contributed to that. Now I’m in retirement that outstanding money would be of great benefit to me, be careful of when and how you loan your kids money. I never mentioned the $85,000.00 to Centrelink because deep down I know I will never see it again.
Hi Murray, thanks for sharing your experience. To be honest it sounds deeply hurtful, so we can only help by sharing this experience, it may help others consider the cons as well as pros of family loans, warmest, Kaye
We found out early in our marriage, as reasonable income earners, family would use us as an ATM as long as we were ‘soft’ enough to let them. It caused a lot of unwanted stress between us as partners. It got to the stage we were going without & never seeing any return of monies lent. I was at boiling point. Have the conversations before the behaviour destroys relationships & lifestyles. We don’t lend money, we ‘give’ money if necessary. This happens so rarely as we both have to agree. Learn to say ‘NO’ & mean it. We have found the people asking will always find Plan B, if they are given a NO. Now they never ask. (This wasn’t easy at times & caused many arguments & fractured relationships for a time.) Raise your kids to be self sufficient & be brave enough to let them grow up.
Wow GD, sounds like you’ve got this sorted! Not being asked for $$$ must be a relief? warmest, Kaye
I contribute to my grand child’s education fund for swimming lessons and school fees as he is a country boy. It gives a very positive return in my lifetime that I get to see. Strings attached for money loans/gift is way to go.
I have made loans to both my sons on the basis that the loans would be paid back. The amounts were unequal but the reasons for this were discussed and one of them has repaid all but $8,000 of a $75,000 loan and the other $2,000 of a $16,000 loan. I drew up loan agreements and submitted these to Centrelink to distinguish them from a gift. We believe they grew up with the right values. Additionally, one of the sons is renting his property and lives with us and pays us a reasonable amount of board. He looks after our property and pet when we go away. There is no rancour in any of these arrangements. My son brought me a tee shirt with the words “ATM inside”!
All good for now!
As parents, we love our kids and grand kids. While we do dig into the purse to help strangers, so do we dig deep to help our kids. While we wish they were more responsible with their finances, never the less, we do help them if they were in trouble financially. While we expect them to be financially independent, a little help here and there is nothing to be worried of. The times have changed and today’s generation has to face far many challenges.
Rao that is fine if you can afford it!
Some parents will still help even if they can’t actually afford it because they/or their adult kids lay guilt trips on themselves.
Yes good communication is the key and if our adult children do not want that then why risk our futures.