When your adult children ask for help during tough financial times, curtailing your natural parental instinct to fix everything can be difficult. But if not careful, financially assisting your adult children could interfere with your own long-term goals, particularly your retirement. Whether their financial problems are the result of a job loss, mounting debt, recent divorce, medical problems, or other issues (such as a global pandemic), there are smart ways to financially support your adult children without derailing your retirement.
According to a 2019 study, approximately 40 percent of empty nesters are still supporting their adult children in some way, one of the most conservative percentages cited for this statistic. And this percentage will likely increase due to the current COVID-19 pandemic. If this statistic hits home, you can exercise some or all of the following smart ways to financially support your adult children without derailing your retirement:
1. Provide for their needs instead of handing out money. Before you grab the checkbook to ease your adult children’s financial problems, offer to provide some of their necessities in lieu of money. For example, you can provide support by delivering weekly meals, caring for grandchildren during a second job shift, providing a place to live rent free, and more.
2. Do not deplete your own retirement account(s). Likewise, do not alter your planned contributions to them. If a money loan is absolutely needed, only loan money to your adult children from your own surplus. Use personal cash sources like future vacation money, savings account(s), and holiday or gift reserves instead. If it makes prudent, financial sense for you, you could also use a home equity line of credit if the need for funds is that critical for your adult child’s needs.
3. Create a written agreement with reimbursement plan. In order to guard your own financial future and teach your children financial independence, create a plan that includes clear restrictions and timelines to guarantee reimbursement of loaned money or provided necessities. Additionally, create an agreement, preferably written, with relevant information such as terms, loan repayment dates, and potential consequences. You can always choose to alter or discard the plan in the future if needed. Note: This is necessary if the amount of money your adult children need exceeds annual gift limits. Otherwise, they will incur a tax liability as funds that exceed that limit are considered income to them.
4. Address the fundamental issues at the same time. Underlying issues, such as mental health matters or lack of proper job skills, can cause or exacerbate financial insecurity. If necessary, blend your financial support with supplementary support from psychological therapy, budget instructions, financial advisory, additional vocation testing, and/or other needed services.
5. Know when to break the giving cycle. Agreeing to help your adult children during an unexpected financial crisis is understandable. Children who remain dependent on your checkbook, deliberately or not, is an entirely different matter. The balance between protecting and teaching your children can be extremely tough. Even tougher would be the future burden of your long-term care on them if your own savings are depleted. Therefore, it is tremendously important your children learn how to handle their own financial issues independently, and as soon as possible.
Following these smart ways to financially support your adult children without derailing your retirement will not only keep your own financial future secure, but it will also foster much-needed financial independence for your children.