How much is too much help for your children? Asking the hard questions and not sacrificing your savings plan is key.
Helping your kids get a good start in life is a priority for many parents, and it often extends well past childhood and into adulthood. Alleviating some of the financial burden while they are getting careers going or providing housing or other forms of support has become not just normal but necessary.
But we are in a very different cycle now from the low interest rates and stable, expanding stock market we enjoyed prior to the pandemic. Retirement planning when inflation was reliably low, and retirement account balances usually increased every year was a lot less complicated than it is now, and it left room for diverting money to other uses.
Finding ways to make income dollars stretch to cover current expenses, save for the future, and to support adult children is more difficult now. The monetary actions taken to combat inflation have resulted in high interest rates on credit cards, auto financing, home loans, and other types of loans. Inflation is still taking a bite, and investment markets are more volatile.
How can parents balance helping their kids with ensuring their own financial goals and retirement plans stay on track?
Let’s Start with the Data
There are lots of ways to help, and smaller or one-time monetary assistance may not have a financial impact on parents. Let's define the potential impact: It could be to retirement savings, current goals like paying down debt or maintaining an adequate emergency fund, or saving for another longer-term goal, like buying a second home or investment property.
A recent survey by Bankrate found that sacrificing their own financial priority or goal is something that 68% of parents with adult children have done to help out their kids, either currently or in the past.1
The extent of the impact matters and 31% of parents of adult children surveyed described it as a significant financial sacrifice.
Make Sure You Understand the Risks Involved
If you are still some ways away from retirement, it can feel like cutting down on retirement savings temporarily may be okay. Or if you're close to retirement and have a good nest egg, you may feel it's safe to tap into it early to help out your kids. The costs may be greater than you realize in both cases.
By cutting down on the amount you contribute, you are costing yourself the potential power of compounding. The more you invest now, the longer it has to grow. You may also be in for a bigger tax bill if you aren't maximizing tax-advantaged contributions. Taking money out of a retirement fund is expensive as you'll need to pay the penalty and the taxes, and when the market is volatile, it is also risky. You may have to liquidate positions that have declined in value, and if the market is choppy, it can take a very long time to recover your balance with investment returns.
Your emergency fund is even more critical now. When interest rates were low, relying on credit cards to cover unexpected expenses was less risky. With higher interest rates, you'll be paying a lot more, and it may take longer to pay off the debt.
Get Coordinated and Set Ground Rules
If you do decide to help your children, there are some ways to do it that can minimize the impact. First off, start with your budget and make sure you and your partner agree. Are there budget sacrifices you can make that will free up funds, either temporarily or long-term?
For example, reviewing eating out, streaming and cable subscriptions and packages, or even a planned trip that can be scaled back or canceled can create financial flexibility in the short term. You'll need to get everyone on board with these changes, including the adult child who needs the funds. And if you're making budgeting sacrifices – they should, too.
You also want to set both expectations and ground rules for repayment. Are you paying off an emergency expense, like a pet bill, or is it assistance with student loan debt or rent that is likely to go on for some period of time? It's important to set financial parameters for what is possible.
It can feel like you are adding to the stress your children are experiencing, but it's better for everyone to have a clear end date so no one is surprised, and you won't be tempted to help out for longer than you can afford.
Will you ask them to repay it if it's a considerable expense? While they most likely won't be able to pay you back in a lump sum, paying consistently creates discipline and accountability. Once their financial situation improves, they may be able to pay back over time.
Don’t Wing It – Plan It Out
If you do decide to sacrifice funds that you had earmarked for your own financial goals, have a plan in place to do it correctly. Think through:
Are you taking enough risk in your retirement plan to help keep you on track for your goals?
Can you get approved for a home equity loan, so if you need funds you have a lower-cost source to tap?
The Bottom Line
You’ll probably never stop wanting to help your children get the most out of life, and you’ll always want to be there for them. But it’s important not to sacrifice future financial stability. Keep in mind, they have a much longer time to get their financial journey on track than you do, and you want to be sure you have a secure financial future.
1. Bankrate Financial Independence Survey, March 2023.
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