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 savings or 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!
