Don’t Let Your Kids Ruin Your Retirement Plan

By Carl Lachman, MBA, CFP®

It’s Instinctual

I doubt that anyone had to tell you to look out for your kids. It was instinct. You loved them from the first moment. After that moment, you didn’t really know them yet, but you were ready to die for them. That instinct lasts even when those babies are 50 years old adults.

You have spent a large part of your life looking out for your kids and keeping them safe. It’s no wonder that it is hard to modify those feelings and habits as your kids become adults. As they enter young adulthood, they start making decisions and they move out of your control. Some of those decisions will turn out badly, some of those decisions involve money, and sometimes they might come to you for financial help.

Should You Always Help?

You sure want to. As we just agreed, you have spent a big part of your life helping them and your first instinct will be to save them from their decisions that go wrong. But should you? Maybe and maybe not. Good people can disagree. I can see reasons why in certain circumstances you should be tough and let your kids live with the consequences of their financial decisions. But, I can also see that at other times you should probably give them an unexpected and unearned second chance. I think pretty much all of us have been given some unearned benevolence by our parents, at least a few times.

What Are the Consequences for Them?

If you help your adult kids out financially, what consequences will they face? Will they learn a positive or negative lesson? Will they learn that they don’t need to worry about the results of their decisions and that they can take advantage of you in the future? Or will they learn that you love them and they don’t deserve your help this time, but if they make the same decision again it is on them? You will have to wrestle with these questions.

As a fee-only financial advisor for 17 years with graduate degrees and special industry certifications, I have a lot of education, knowledge, and experience, but I haven’t completed any courses on adult child financial assistance decision-making. I would collect advice from trusted friends, relatives, and your spouse to see if they have helpful insights. As an ancient writing says, failure often comes from a lack of counsel, whereas consulting many advisers usually brings success.

What Are the Consequences for You?

The consequences of your financial help to you is where I can help you make a good decision. In this case, it’s just numbers and math.

And, maybe “ruin” is too harsh a word for what your decision will do to your retirement. Certainly you can help your kids with money at some level and it won’t really affect your retirement at all. Maybe it’s really about understanding how your retirement might change if you help them out.

In our financial planning firm, we often are consulted on financial decisions involving the spending of large sums. We are asked, “Should I spend this money?” Should I buy this car? Should I pay off this loan? Should I help my kids out?” Almost always, we put the answer to these questions in the context of a retirement projection.

Yes, there may be positive and negative consequences for you in terms of emotions and your relationship with your kids, but I am not much help with those. I primarily help determine what the positive and negative financial consequences are for my clients.

Retirement Projections Help Gauge Financial Consequences

Retirement projections are a common tool used by financial advisors. They help determine what money will be available to live on when one stops working, with assumptions on current financial assets, annual saving, investment returns, inflation, and timing. But, although retirement projections are making estimations of future money, they can help make money decisions today.

The way that projections do this is by changing the assumptions on current financial assets and annual saving. If you give your child $10,000 today, that money comes out of your current financial assets, which decreases the growing investments you will rely on when you stop working. Or, if you give your child $2,000 a year for 10 years, that will decrease the amount you can save each year in your retirement accounts. Sometimes when we make these changes to a retirement projection the estimated changes are small, like the projection says your annual income in retirement will only change $300 per year. But, other times, the change in assumptions drops a person’s estimated income in retirement by $25,000 per year, every year, in retirement. That sort of change usually gets a person’s attention and helps them make the decision to help their adult child with money.

Living With the Financial Consequences

Once you see the financial consequence to your retirement by helping your child financially today, you can decide the best decision for you. If your retirement projection changes a lot, but it is still more money than you need in retirement, then maybe you will decide on giving money to your child. And, if the retirement projection changes a lot and now you won’t have enough income in retirement, maybe you are still okay with the result because you wanted to work longer anyway. Maybe you will even have to go into debt to help your child – which I will probably advise you not to do since I try to get clients out of debt by retirement – but if you understand how giving money to your child will change your life and your financial security and you still want to go forward with it, who am I to say it is a bad decision? I believe it is my job to give you advice and accurate information, but ultimately it is your decision.

Alternative Solutions?

Are there other solutions to helping your child financially that don’t involve giving them cash or going into debt for them? Sure. Many. Some might apply and some might not. For instance, you might let them move home. You might pay their medical insurance for 6 months. You might make contributions to their retirement account for them. You might co-sign a loan for them. You might give them a loan yourself. You might help them buy a condo. You might show them how to clean up their credit report. You might have them meet with your financial advisor. You might show them how to negotiate with creditors. A good financial advisor will have probably seen the situation before and be able to give you options to consider.

Ask Us

If you have a financial advisor, ask their help with your financial decision to give money to your child by running a retirement projection. This should be something they can do easily for you. If they can’t run a retirement projection and don’t have the experience to suggest options, maybe you don’t have a good advisor.

We meet with prospective clients often and we are willing to give a little free advice in those initial meetings. In fact, we have run quick retirement projections to help them get a rough estimate on the consequences of a money decision. Such projections are not as accurate as the ones we can do for clients where we have more information, but we are happy to run them to help a prospective client with an immediate decision.

And, we can talk through the different options and give additional ideas. We don’t always have good ideas, but if we don’t, we are resourceful and we find answers for our clients and their friends.

Although our firm is a fee-only financial planning firm, we are really in the business of helping people find peace of mind. Running retirement projections and helping our clients with decisions on helping their adult children with money are some of the ways we help find peace of mind. If finances are making you anxious or keeping you up at night, contact us to meet or schedule a 15-minute discovery call with me or one of my firms other fee-only financial advisor to discuss your personal situation.