If you’re a parent, you likely will do anything for your children. Unfortunately, for many retirees, their admiration may come at the cost of derailing their retirement plan. Retirees who pay for their adult children’s expenses can easily overshoot their budget, and in turn, get off track from their retirement plan..
If lending your children a helping hand is important to you, find a way to include the expenses in your goals and budget. Otherwise, consider the following options for helping your family without hurting yourself in the process:
1. Make a Plan
If your children ask for financial assistance, take a moment to consider:
- Is your adult child’s financial difficulty pervasive or temporary?
- Does your child have a plan for avoiding future pitfalls?
Lending money can be a slippery slope. If your child’s financial difficulty is extensive, it’s essential to consider the long-term implications you might be signing up for with a ‘one-time’ loan.
Regardless of your decision, before lending money, talk to your partner and approach your response with a unified front. It’s critical to be on the same page before discussing options with your loved one.
2. Determine Your Actual Ability
If your child’s financial request is for a one-time need, like a few thousand dollars for a down payment on their dream home, it’s hard to say no. Still, before opening that checkbook, ask yourself, “can I afford it?”
Of course, we all want to splurge on our children’s happiness, but retirees must keep a balance. Once the money is gone, it’s gone. Will it hurt your financial stability?
As a rule of thumb, make sure you only lend money you truly will not miss.
3. Consider Your Options
If you do decide to help your child or grandchild, there are several ways you can extend financing. For example, do you want to take out a personal loan or co-sign a loan from a bank or other financial institution?
If you take out a personal loan, make sure to have an explicit agreement about how you will help, and if you require terms for repayment.
If you want repayment, write out the terms of the loan on paper and have both parties sign:
- Amount of loan
- Interest rate, and if the rate is calculated simple or compound
- Payment due dates including the date of full repayment or final installment due
- Recourse if the borrower defaults or is late like charging late fees, increasing interest charges, ceasing any further loan payments, or taking legal action
Clarity will keep your financial arrangements straightforward and mutually understood.
If you decide to co-sign on a loan, remember, you are legally binding yourself to repay the loan if your child fails to do so. If your loved one needs a co-signer, it usually means the lender considers them too great a risk for them to take alone. For that reason, consider the severity of co-signing. If a loan becomes delinquent, it will also affect your personal credit.
Protect yourself. Before co-signing, ask for a copy of your loved one’s credit report, credit score and monthly budget so you have an accurate picture of their ability to repay the loan, and what financial obligations might fall onto your plate. For free credit reports go to annualcreditreport.com, which is the only official site explicitly directed by Federal law to provide them.
Meet with the lender personally to understand the terms of the loan, get copies of all documents related to the loan, and ask the lender to notify you in writing if your family member misses or is late on a payment.
4. Is Non-Cash Assistance an Option?
If you decide to give an outright gift, consider providing non-cash assistance, like a gift card, or pay one of their bills directly.
For cash gifts, determine how much you can afford to give without putting yourself in jeopardy. You can either give the amount in a lump sum, or you can spread it out in smaller amounts over a period of time until the situation is resolved.
It’s also important to communicate with your loved one that you are providing a gift, not a loan. Addressing your generosity eliminates awkwardness, and will alleviate stress from the recipient who may not know if they are required to pay the funds back.
5. Provide Guidance
When your child asks you for money, it’s a great opportunity to impart financial wisdom you’ve learned.
If you are able, provide them with a side job, or help them create a bill-paying plan to help reiterate the value of your money. If the issue is persistent, try steering them toward local resources like career counseling, debt counselors or training programs for deeper education about personal finance strategies.
Start a conversation. Ask your family member what he or she needs to get out of their current situation. This way, you have a better idea of the type of information or assistance may be helpful. For example, if they need to make more money, help them update their resume or introduce them to people who can help them find a different job. They can also pick up a side hustle to help with monthly expenses.
As parents, we are not really supporting our children when we put our retirement security at risk. Retirees need to put themselves first – not to be selfish – but to ensure the financial well-being of everyone in the family.
Help Yourself to Help Others
The last time you traveled on a plane, did you hear the flight attendant say “Should the cabin lose pressure, oxygen masks will drop from the overhead area. Please place the mask over your own mouth and nose before assisting others.”
This is the metaphor to consider before assisting your adult children or family members financially.
Secure your breathing first before looking for ways to help others.
Family members and money are difficult conversations and often not a good mix. During tough economic times or faced with unexpected emergencies, your adult children may truly need your assistance. Be careful and thoughtful about how you can help - make sure you aren’t taking your own breath away.
If your own resources are limited, consider other ways to provide meaningful and creative ways to help.