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Should you become the credit union of Mom and Dad?


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June 19, 2022

As a parent you dream of raising your children to be confident, independent, and self-sufficient. You hope that loving them, being a fitting example, and financially supporting them during their childhood that they will be ready to leave the nest, ready and set for success. So, what do you do when your now-adult child asks for financial help?

If you are retired or nearing retirement it is important to remember that you need to prioritize your financial security. It's completely natural and instinctual to want to help your child financially, especially if they are in trouble or in a bind. But, if you are living on your savingsor actively contributing to your retirement nest egg, you must be careful. If you do choose to provide financial assistance to your child or grandchild, here are some key guidelines to consider to avoid jeopardizing your retirement plan.

Communicate Repayment Guidelines. Parents often have the intention of having their child repay the money borrowed but fail to follow through. You need to be abundantly clear that your expectation is for them to pay you back. By doing this there will be no confusion or misunderstanding in the future. Note: If you decide that the assistance will be a gift for 2022 you can gift up to $16,000, a total of $32,000 if you have a spouse, a year (for 2022) without filing a gift-tax return.

Clearly Identify Reasons for Loan. A best practice is to only help with critical bills, such as health insurance, medical bills, or essential repairs. If you decide to help your child only in an emergency, make sure you stick by this. Explain to them in detail what you consider to be an emergency and avoid granting any future assistance unless it constitutes what you both originally agreed upon. Avoid giving money for material things or experiences like travel.

Formality is Good.  Details are important! What are the terms (length and interest rate) for paying back the loan? These items need to be agreed upon as it will teach your child an important lesson about borrowing money. Initially, it may be uncomfortable, but it is vital for the loan experience to go as smoothly as possible. Write down all the loan details, including the purpose, amount, and repayment schedule. Download a loan agreement online and fill it out. It's in everyone's interest to formalize the specifics of a loan no matter how small. Once the terms have been agreed upon, follow through and have both you and your child sign the loan agreement. This makes it official and helps your child understand the formality of borrowing money.

Explore Your Options. If you are considering tapping into your retirement savings to help your child financially, have you and your child look at all available options first. What are the options for them to take out an official loan from a bank? Do they have something they can sell or use as collateral for a loan? Your child has a much longer runway of time to pay off loans and build wealth. As a retiree or soon-to-be one, your timeline is much shorter when it comes to your ability to pay off debt.

It is natural to want to help your child or grandchild during times of financial stress. However, coming to the rescue every time your child is in trouble could instill poor decision-making and be more harmful as they get older -- especially when Mom and Dad are no longer there to save the day. With planning and guidance, loaning or giving your child money can be well-executed without burdening your finances or escalating familial stress. Therefore, it is important to discuss with your financial advisor, to help you determine the impact a gift or loan may have on your future retirement plans.

If you would like to receive more information on making smart money moves for your future, be sure to contact us today!


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About the author

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Matt Goldstein

Managing Director, Private CFO®

Matt grew up just outside Washington DC in Silver Spring MD. He attended Florida State University and completed The Wharton School of Business executive leadership program. Outside of work Matt is a family man and loves spending time with his wife Michele and his two daughters, Mackenzie a freshman at Emory University, and Lexi a Freshman in high school and his two dogs. Matt is also an avid ultra-endurance athlete and loves training for his next big race. He has completed 17 marathons and qualified and finished the Boston Marathon twice, 3 Ironman triathlons, and multiple Ultra trail marathons including a 100K. In August he will be attempting the Leadville 100 which is one of the toughest ultras in the world.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. Investor Disclosures: https://bit.ly/KF-Disclosures

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Background and qualification information is available at FINRA's BrokerCheck website.

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Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice. https://Bit.ly/KF-Disclosures

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