Help your kids without hurting your retirement

When does parental generosity become detrimental to our own finances? It’s a very hard line to draw in the sand.

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We all want to help our children, but how can we do it without compromising our own retirement?

I’m relatively new to parenthood and recently it was my son’s second birthday.

My wife and I watched with anticipation as he madly opened his birthday present.

I now get how for years on end you want to give to your children.

I can see my future now: new bike for his 4th birthday, a car for his 18th and quite possibly a house deposit for his 25th.

But when does parental generosity become detrimental to our own finances?

It’s a very hard line to draw in the sand.

It is a question I get from a lot of my retired clients.

I have the hard job of saying “Yes, you have wealth to share with your children, but it is going to detrimentally impact your retirement plans.”

That is a hard conversation to have.

A good example is a couple aged 71 and 69 who have two children that are now in their early thirties and do not own a home.

The children have managed to save around $30,000 each towards a home deposit.

With banks now wanting up to a 20 per cent deposit for first home buyers, each child is looking like they need to save another $50,000 each.

This couple are comfortable in their retirement.

They have $560,000 in their superannuation fund and $150,000 in personal shares.

This provides an income of around $65,000 per annum.

At this rate, their capital should last them until the ages of approximately 92 and 90.

The children are asking for $50,000 each to help with a house deposit and mum and dad have funds to help.

But giving away that $100,000 now will see their capital disappear at age 89 and 87.

If the parents were to fully provide the deposits for their children’s homes that will see their capital diminish as early as ages 87 and 85.

We should also consider that by their mid-eighties, the couple may need to enter aged care.

How will aged care be funded if they run out of capital in their mid-eighties?

Their home may need to be sold.

We can see the impact on parents for providing a lump sum of cash to their children and how it does affect their superannuation fund and personal wealth.

It does have an impact on their ability to fund their own retirement and aged care costs.

There are ways you can help your children and not have a detrimental impact on your own retirement plans.

Rather than giving cash, you may be able to use the equity in your home to be guarantor for a loan your children take out with a bank to buy a home.

In many instances this may remove the need for your children to pay lenders mortgage insurance. This can save up to 1-2 per cent of the home purchase cost.

Loan money to your children rather than give it.

If you do have some surplus cash earning below 3 per cent consider an arrangement with your children where they pay you interest at a rate above what you would earn from the bank and below what they would pay to a bank.

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