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Any parent wants the absolute best for their kids. We all want a future for our children that is better than ours. But is there a point where support crosses a line and becomes a form of dependency for adult children while putting the financial security of the parent at risk?
There is a case to be made for generosity, and we should give sooner rather than later. But how can this be done successfully and responsibly?
I’ve been blessed to work with many generous clients. They want to give back to their community and provide support for their families. Those instances were responsible and should be encouraged, but there have been situations where the generosity of a parent not only led to overspending, but to the dependence of their adult children.
In one case, a client’s desire to assist their child in paying for their undergrad degree led to them funding a graduate degree and the subsidization of their child’s living expenses after graduation. A planned expense turned into hundreds of thousands of dollars of spending and a child with multiple degrees who is still dependent on parental support.
I’ve also seen this play out from the viewpoint of the child. Planning becomes incredibly difficult because the relationship with money is not healthy. Unsustainable withdraw rates, extravagant expenditures, and lack of financial purpose and clarity all exist when money is gifted irresponsibly.
What can we learn? Generosity is amazing. Supporting your children is nonnegotiable, but there has to be a limit. Depending on one’s financial situation, there are constraints that have to be placed on support, especially in a retirement situation.
Every retirement plan has a few levers to pull:
- The length of time retirement will last. The shorter this length, the easier planning is, and you shorten this by working later or passing away earlier. Neither are ideal.
- The amount of money in a portfolio and income expected. A retiree accumulates assets by saving for decades or selling a business. Maybe they work for the government and receive a pension plus some Social Security. This is the amount of money we have available. By saving more, working longer, and allocating investments appropriately, this part of the plan can be maximized.
- The amount of expenses expected. This is what you need to spend. The smaller the amount, the less money you have to save or the earlier you can retire. When this is accurately projected and followed as best as possible, retirees are on the best path for long-term success.
What happens when generational support gets out of hand? A retirement plan is built on balancing the three levers previously mentioned. Obviously, some events will happen that will be out of our control, but we have to ensure we maintain control where we can. Here’s how we can maintain control while gifting or supporting adult children:
- Before agreeing to support children, confidently estimate what amount of support you can give and how long that support will last. For example, we will pay for tuition for grad school for two years. All other expenses are up to you.
- Have set conditions for when support will cease. Example: When you graduate, all support will stop. It’s our prerogative to give more, but barring catastrophe, you are on your own.
- Instill gratitude in your kids. It’s never too late to start. Whether your kid is three or 53, if a generous action is not met with gratitude, it can be noted and corrected. The best way to enjoy your giving and not have it looked at as an expectation is to confidently give to a thankful individual.
When it comes to giving to your children, do it. Give often, sooner than later, responsibly, and know that all gifts don’t come in a monetary form. A financial plan built around you and your values will facilitate this.
Geoff Schaefer, CFP® is a financial planner and wealth manager at Intergy Private Wealth in Colorado Springs. He works with clients ranging from mid-career with families to the actively retired. At Intergy, the goal of planning is to balance the heart and values of clients with the math and money. Geoff's regular writing can be found on Intergy's blog www.intergywealth.com or on his personal site, www.thesteadfastfiduciary.com
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
