Helping Without Hurting Your Retirement

By Holly Gallagher, September 10, 2017, Traverse City Record Eagle

A large portion of the millennial generation has come of age during complex and challenging economic conditions. While the economy and job market have begun to improve, the headwinds that millennials have faced in starting their careers and making long-term financial plans have led to a few trends that are affecting their parents’ generation as well.

Many parents of adult millennial children find themselves wondering how much they should help their kids. Providing financial support to a family member can affect their own retirement plans.

Staying in the nest longer

One way young adults are staying afloat is by staying in their parents’ homes. By providing free or cheap housing, parents arguably are preventing their young adult children from falling into greater debt. The expectation, of course, is that these young adults will progress in their careers and eventually have enough earning power to achieve financial independence. But can you count on this happening? More important, what’s the exit strategy?

Footing the bill

If you’re still on the hook for financial support for your young (or not-so-young) adult child, you’re not alone. According to a 2014 American Consumer Credit Counseling survey, more than one-third of U.S. households provide regular financial assistance to adult children including paying rent, repaying student loan debt and covering car payments and cell phone bills.

Even if you haven’t dipped into your IRA to pay for your daughter’s wedding (and, please, don’t do that), these smaller amounts — a couple of thousand or even a few hundred dollars at a time — can have a detrimental effect on your retirement savings if they continue over the long term.

Is it a loan or a gift?

Another element to consider when providing substantial financial support to your child is the annual IRS gifting limit. For 2016, couples can gift up to $28,000 before having to report the amount to the IRS. In some instances, the same limit can be applied if you loan the money to your child (e.g., as a down payment on a house), but either consider it interest-free or charge below-market interest. For any amounts over these limits, you’ll be on the hook for taxes.

It’s important to note that gift and estate tax rules differ from state to state, and each situation is different. Consult with a qualified tax professional about the impact to your tax bill.

Setting a precedent

As parents, your goals are noble and well-intentioned — but do your actions foster the habits that will lead to financial success and independence? Or are they possibly setting the expectation that you’ll continue to fund a lifestyle that your children may never be able to afford on their own?

Learning to live within our means can be a challenge at any income bracket, and cutting your kids off financially or enabling bad habits is a tough line to tread. Here are some compromises you might consider:

  • Charge rent. Don’t necessarily expect market value for your accommodations, but you have the right to set boundaries that keep both parties feeling comfortable with the arrangement.
  • If not rent, pick an expense and be consistent. Among utilities, groceries and other expenses, there are many different ways your millennial can be accountable for at least some household needs.
  • Set boundaries. Separate wants from needs — you don’t need to finance your kids’ vacation or spa visits.
  • Live within your own means. Unless you want to end up on their doorstep someday when your retirement funds run out, be disciplined about sticking to your budget and savings plan.

Above all, make sure to discuss your actual spending needs both as a family and with your financial and tax professionals. You’ve put time and effort into building a sustainable retirement plan. Don’t derail your hard work by giving away more than you can afford.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>