Tuesday, June 13, 2017

Should You Loan Money to Adult Children?

Retirees and those approaching retirement frequently face a common dilemma ... should they give or loan money to their adult children?  A Pew Research Center survey in 2015 discovered that approximately 61 percent of people with adult children had helped their kids out financially during the preceding year. The decision to help or not to help can be difficult, especially if grandchildren are involved.  Many retirees wonder when they should agree to co-sign a lease, help their adult children purchase a car or assist them financially in other ways, and when they should say "no."

In a January, 2017 article in AARP Magazine, titled "The Bank of Mom and Dad," Stephen Perrine, the author, suggested four questions to answer before you either lend or give your children money.  He also presented several examples to help people understand how to apply the answers.

Questions to Answer Before Lending Money to Adult Children

1.  Is the money intended to be used for something they simply want, but don't need; or will it add real stability and security to the child's life?  (Necessary)

2.  Will this be a one-time or short-term gift or loan, or will it be something which will require an ongoing financial commitment lasting for years?  (Short-term)

3.  Will your financial assistance require you to co-sign a contract?  Could it hurt your credit?  Is there a financial risk to you or your adult child?  (Financially safe)

4.  Can you give or loan this money to your child without it damaging your relationship?  Could it cause future tension or resentment?  (Emotionally safe)

How to Decide Whether to Help Your Adult Children Financially

When you consider the above questions, obviously the best time to help your child financially would be when it is necessary, short-term, financially safe, and emotionally safe.  Of course, life is not always that simple.

Ideal situation:  When one of our granddaughters needed braces and her mother, our divorced, hard-working daughter, could not handle the added cost by herself, my husband and I were happy to step in and make the monthly payments.  Towards the end of the contract, our appreciative daughter had secured a better paying job and took over the payments herself.  At the time we decided to help, we believed our decision was necessary, short-term (although it went on for a couple of years), financially safe and emotionally safe.  We could afford the payments and our daughter could not. We had no problem making the decision.

Complex situation:  Not all decisions are as clear as the one above.  For example, what if your child "needs" a car to get to work.  Should you help them with the down-payment or co-sign the loan?  If they are asking for your financial assistance, you are within your rights to only offer a limited amount of help, especially if your decision could put you at financial risk.  You may want to insist they purchase a practical, used car.  You might decide to provide a down-payment, but not co-sign a loan.  If you do decide to co-sign the loan, you need to understand that it could affect your own credit, particularly if your adult child begins to miss payments or make late payments.  Could you afford to take over the payments if your child defaults?  In this case, the purchase of a car might seem necessary, but it would not be short-term assistance, financially safe or emotionally safe, since it could create a strain in your relationship with your child.

Other types of situations:  In the AARP Magazine article, Perrine also discussed other complex situations such as paying for an expensive wedding, co-signing a lease or mortgage, giving or loaning your children money for a down-payment on a home, helping an adult child with young children recover from a divorce, investing in a business opportunity which interests your kids, or paying for graduate school.  In each situation, you need to ask yourself if the gift or loan is necessary, short-term, financially safe for you both, and emotionally safe for your relationship.

Some of these decisions will be much easier than others.  Most important of all, you need to consider whether or not helping your adult children financially will endanger your own financial future.  If giving them money would mean you may not be able to take care of your own retirement needs, then you will probably want to deny the request, no matter how necessary the expense may seem to be.

If you are interested in more information to help with your financial planning, family relationships, finding a place to retire, Social Security, or Medicare, use the tabs or pull down menu at the top of the page to find links to hundreds of additional articles.

Watch for my book, Retirement Awareness: 10 Steps to a Comfortable Retirement, which will be released by Griffin Publishing in 2018.

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1 comment:

  1. This is a very important topic and you've outlined the pros and cons perfectly.


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