How to Help Adult Children – Without Risking Your Retirement
When you see that your children need help, it can be hard not to step in. Whether it’s with time, advice, or even money, many of us parents have a lifelong urge to do what we can.
But if you’re in retirement or close to it, you might want to think twice about offering financial help.
After all, these could be some of the most fragile years for your long-term financial security. That’s because of “sequence of returns” risk. In a nutshell, sequence of returns risk describes the reality that there are long-term effects to short-term investment performance. Namely, a bear market early in retirement can have a lasting impact on your savings as a whole.
We’d argue that the same risk holds true for large expenses early in retirement. Giving too much too fast – especially when it feels like you’re sitting on a significant pot of money – could put you at risk if your expenses ever have to go up.
But that doesn’t mean you can’t help your children – it doesn’t even mean you can’t give money. But it can pay to be strategic about it. Here are a few alternative options for helping out without cashing out.
It’s not exactly the most invigorating subject, but focusing on providing an inheritance can help you make the most of your resources on your heirs’ behalf while leaving the flexibility to control your own finances.
There are a few key ways to do it:
Life insurance beneficiary designations: Life insurance can provide a tax-free, lump sum payment to chosen heirs at the time of your death. The amount is known in advance and is guaranteed by the insurance company, so there’s also a degree of predictability (though as with any product backed by an individual company, it’s important to do your homework). Not all retirees benefit from life insurance coverage, so it’s worth speaking to an advisor about the suitability of it for your situation.
Annuity death benefits: For those with annuity income, you can typically purchase a death benefit rider to provide income or cash payouts to loved ones. Death benefit riders are often used for spousal support, but they can be a useful way of providing income as an inheritance for heirs. Be sure to speak to your advisor about whether an annuity is right for you, and whether adding riders like these is appropriate for your situation.
Family trust instructions: Trusts can be a powerful financial planning tool in the right situation. They can help families avoid probate, seamlessly transfer control of assets from one generation to the next, and provide total control over inheritance decisions. In other words, instead of simply leaving money to your heirs, you could provide detailed directions for your wealth – that a certain amount is for a grandchild’s college tuition, for example. A trust can also help protect your family against creditors and other risks. We recommend speaking to a qualified estate attorney for help, as trusts can be very technical.
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What if I have ample resources?
We have clients, Cindy and Jonathan, who dedicated themselves to financial security early on. They planned carefully, saved more each year, and worked with their advisor to map out a retirement plan. Though Jonathan also made this note: “Don’t forget to say we’ve also been lucky!”
Lucky or not, Cindy and Jonathan came into retirement with ample resources, several fallback plans, and a desire to help their kids. “They’re hard at work building their own careers, and I really do think it’s harder these days,” said Cindy, “We had our challenges, too, but it seems like young parents today are expected to simply do everything right – and also pay for it.”
The couple wanted to either provide money or help pay off mortgages, but based on their tax situation Cindy and Jonathan’s Vitucci & Associates advisor cautioned against it. Instead, they considered an alternative that avoided the gift tax while still being incredibly useful to their family: contributions to several 529 college savings accounts for the grandkids.
With recent tax law changes, which will allow 529s to be used for private school tuition payments, the couple’s contribution to their family members could be even more powerful. “We feel good that we could help take one source of stress away,” said Cindy. “It’s not a paid-off home, but maybe in the long term this is actually even better.”
Of course, before making these types of gifts, it’s important to consult with your financial or tax advisor, particularly after the passage of 2017’s tax reform bill.
Remember: practical help can also be financial help
Finally, it’s also worth remembering that practical help can mean just as much to your family as money. Whether it’s childcare, organizational skills, or cooking dinner a couple times a week, assistance with the basic necessities can both bring you closer together and cut costs (not to mention stress) for your kids.
We call this one the gift of time: for families that live close to each other, regular contributions to each other’s lives really can strengthen bonds and make it easier for everyone to manage the ups and downs of life.
After all, parents who want to help now might also need help later. It’s our experience that forging a family culture of mutual assistance can take some of the sting out of needing a hand, whether it’s for a proud provider or a fiercely independent adult child.
Are you looking for ways to build your family’s legacy?
Helping your children may just one part of a larger plan to provide opportunity and resources to your family. Download our free guide to full family financial planning, From the Bucket List to the Bank, for more tips and ideas on estate planning, forging family bonds, and managing the risks that come with a multi-generational approach to wealth management.
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