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Dipping into retirement funds early to help adult children could hurt both child and parent later. Here’s how to help clients avoid that mistake.

It sounds like the start of a heartwarming story: An adult child wants their aging parent to move in with them, to help them comfortably spend the parents’ twilight years.

But Travis D. Manning, CFP, CLU, saw a red flag in what, exactly, would be spent: his client’s retirement funds. In this particular case, the client gave his daughter money to put an addition onto her house, where he would live. The 12-year MDRT member from Caledonia, Ontario, Canada, advised against it, asking “What happens if they can’t look after you, if you need specialized care and they can’t handle it? How are we going to pay for that?”

The client was certain his children would cover the costs, and went forward with paying for the house renovation. But after only a year and a half, Manning said the client and his daughter had a major disagreement and his client was kicked out of the house. “Now the daughter’s got an addition on her house and the other two children won’t get an inheritance from their dad,” Manning said. “That’s an extreme situation, but we bring it up because we’ve seen it happen.”

There are plenty of situations that warrant a parent helping adult children financially — emergencies or medical needs, for example — but there are also instances that are far less critical that could have major ramifications down the road. Advisors have to navigate an emotional minefield in these situations, as clients will trot out guilt-ridden reasons for the early transfer of wealth:

“The kids need it more than we do right now.”

“I want to be able to see them enjoy the money while I’m still alive and healthy.”

“I feel bad saying no to my own child.”

Advisors not only have to reiterate an inconvenient truth — you never know what the future holds — but they’re also tasked with helping clients realize that it could set them up for failure. Still, it’s better to have a little squirm today than total discomfort and even displacement tomorrow.

59% of parents pay for their adult children's education.

Avoiding dependency

Although it’s not fair to make a broad-strokes assessment of an entire group of people, there are some financial trends that can be culled from certain generations. As Manning notes, many older adults who lived through major economic hardships such as the Great Depression have an innate instinct for saving money for the future. Others may not have experienced such a profound need to scrimp and save, and as a result they didn’t build the same traits — but that doesn’t mean the parents should pick up the slack.

Advisors often have to remind their clients that solving their child’s problem for them may not be the best way to help them in the long run. Financially bailing out adult children can set up a dependency that’s hard to break.

“A lot of my elderly clients, who are entering retirement or who are already in the retirement stage, have this problem with their young adult children who are not really financially savvy or financially responsible, so they keep relying on their parents,” said Sunny Istar Lee, an 11-year MDRT member from Los Angeles, California, USA. “Parents, without really understanding the consequences, become the bank of mom and dad to the kids.”

A 2017 global report from British international bank HSBC found that 50% of people with children older than 18 still provide them with regular financial support. The study found that 48% of those supporting an adult child have been doing so for more than 12 years, with that child now older than 30.

And where is the money going? HSBC found parents are paying for their adult children’s education (59%); everyday living costs such as utility bills, groceries and home repairs (49%); medical and dental care (33%); and rent or other accommodation costs (27%). Twenty-seven percent are even helping to pay for vacations.

“I know you’re trying to help your kids, but they have to stand on their own,” Manning said of his advice to parents. “The kids might be in their 40s or even 50s, and they’re asking them (their parents) for money. The problem is once you turn the taps on, it becomes hard to turn them off. You say yes once, then when do you start saying no?”

49% of parents pay for their adult children's everyday living costs.

As Lee puts it, parents can’t change their children’s financial diapers forever, and advisors can help urge their clients to break their children’s dependence. Lee said she advises clients to give their children the opportunity to be independent — whether that leads to success or failure. “Help them to really own their own experiences and own their lives,” she recommends. “Having ownership of their lives 100% — that is a really great way to empower them.”

It may not be as direct as cutting a check, but Lee — referencing the proverb of teaching someone to fish, rather than giving them fish — said teaching people how to be financially successful will have a longer-term impact. She said one of her clients brought her adult son to Lee’s office after he graduated from college. Lee used his mother’s financial plan as an example of how to plan ahead and prepare for an uncertain future, and it set off a light bulb for the son. “He wanted to be in the same kind of situation later when he gets old,” Lee said.

Keeping both parties out of the hole

No one really knows what tomorrow holds, but advisors can help families understand the possibilities. And perhaps more importantly, they can help explain how today’s actions impact the tools you’ll have to handle those future scenarios.

It’s worth noting that the inverse can also be true when it comes to familial finances: Sometimes aging clients anticipate their adult children will be able to pitch in monetarily as they age, but they shouldn’t factor that reliance into their planning. 

“I reinforce to the parents that there is only one truth that is certain: The cost of living will only get higher over the years,” said Delia Hui Wong, a 10-year MDRT member from Singapore. “Many of their children will also have difficulty in managing their own living expenses. And they too will have growing financial commitments such as starting a family. Hence, they need to depend on themselves, and not their children.”

33% of parents pay for their adult children's medical and dental care.

Manning said when clients tell him they feel guilty for not offering their adult children more money, he’ll turn the guilt back around to the client: Sure, you can give your children more money today — but do you want to then be a financial burden to your kids in the future when there isn’t money left for a retirement home or medical care?

Wong said she addresses feelings of comparison her clients may feel if they see their peers providing their children with money. “I try to affirm the fact that as parents, their responsibility is to provide,” she said. But she cautions against putting a specific figure on that assistance. “At no time should they ever compare with other parents, because everyone has different financial capabilities and means.”

Advisors can bring the whole family into the conversation to help clarify where money may need to be allocated in the future, to avoid pulling it too early and causing headaches down the road.

“I’ll say, ‘OK, if your parents had to go into a home, do you want to have just a basic government-run one where they’re having to share a room, or would you like them to have their own private room?’” Manning said. “And they’ll be like, ‘Well, private of course.’ I say, ‘Well, then they’re going to need as much money as they can get. And this money has to be ear-marked for that.’ And then a lot of them don’t understand what the costs are.”

Manning said some of his clients’ children see the lump sum of money their parents have set aside and think it’s an enormous amount, with plenty to spare. The reality, though, is that money needs to go a long way.

“People think that when their parents are retired, they have more income sources than they do,” Manning said. “Most of the time, it’s just a government pension and investments and that’s it. It’s not like they’re working and earning more money, but it’s just they see these large bank account balances because they’re not spending as much when they’re older because they’ve paid everything off.”

27% of parents pay for their adult children's vacations.

Manning says one client’s daughter called his office in a rage that her father had far less money left than at the start of his retirement. After reviewing his financials, Manning said it turned out her father hadn’t been gambling or spending frivolously on himself — he’d been giving the money to his children. Manning was able to show the family how their father’s generosity had impacted his savings.

“We could show them, here’s how you guys directly impacted A, your inheritance down the road, but B, how much money your dad has left in retirement,” he said. “Once they saw that, they were mortified because they realized that them asking for money had severely impacted their parents’ well-being.”

But there’s another benefit to bringing the whole family into the conversation: Not only can clients’ children better understand why it’s important for their parents to save their money, but they may see the need for financial security in their own future — making them potential new clients as well.

“Sometimes the kids will become clients because they realize that we really do have their parents’ best interest at heart,” Manning said. “They realize, wow, these guys really are looking after mom and dad. And they say, ‘You know what? I’ve got to get my stuff sorted out. Can I come talk to you?’”

Still can’t convince them?

There are times when advisors are unable to convince their clients not to give money to adult children, and times when it may not be an enormous financial burden on the parents.

Manning says for these cases, he’ll run the numbers through planning spreadsheets to see how much is needed to maintain the client’s income levels going forward, including possible future income needs. He’ll also build in an extra cushion for emergency purposes and market fluctuations.

“If they can pass those tests, I tell them how much I would recommend taking from the excess that is left over,” Manning said, adding that usually the less, the better.

In situations where he finds the client needs everything they have to be secure, he tries to illustrate the impact that giving money away could have. “Then I write up a letter stating that I do not recommend doing this, as it could have severe consequences down the road, and that I will not be held accountable for their decision,” he said. He signs two copies of this document — one for their files and one for his own — as proof that he neither recommended nor approved the withdrawal.

“Sometimes that stops them from taking the withdrawal, or they take a lot less,” he said. “But in any event, they still know that I did not like the idea, and they have to be held accountable for their own actions.”

Lee offers another solution for parents insisting on giving their children money: If they want to be treated as a bank, then her clients should act like one.

“There is no bank that gives free money,” Lee said. “They draft an agreement to pay it back by a certain time with interest. If they default on that payment, there is a huge financial consequence.”

And at the very least, Wong says that if her clients choose to give money to their adult children, she reviews their finances to ensure her clients’ hospital and medical plans are still properly in place.

CONTACT

Sunny Istar Lee sunnyistarlee@gmail.com

Travis Manning travis@evers-financial.co

Delia Wong deliawong@aia.com.sg

 

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