Paul's Insights: Are your grown children eroding your wealth?
I suspect there are few times in life when we take more notice of our investments, and the performance of asset markets, than in the years just before and during retirement. While many people in these life stages worry about the potential for market downturns, their wealth can be impacted far more profoundly by something much simpler - providing financial support to their adult children.
We all want the best for our kids. No question about that. But a new study by Finder shows the extent to which parents can bankroll their adult kids’ lifestyles.
The nationwide survey of over 1,000 respondents found that the “Bank of Mum and Dad” is very much open for business, with 44% of Australian parents helping out their adult children financially. According to the research, one in four (23%) parents subsidise the cost of their grown child’s groceries, 17% let their kids live at home rent free, and as many as one in ten have chipped in for anything from their child’s car or holiday, to a first home deposit and even mortgage repayments.
I have no doubt the cash splash is done with the best of intentions. But by the time our children are adults it makes sense for parents to think about their own financial needs – in particular your standard of living in retirement. So, looking at ways to help the kids calls for some careful thought especially as you could face a retirement spanning 20, maybe 30 years, and your own financial resources need to last the distance.
If you have significant cash savings for instance, and you want to help your child buy a home, one option is to lend them some money, with legal documentation secured against property. That way repayment expectations are clear from the start.
Or, if you have a child paying a home loan rate of say 2.5%, you could have an agreement drafted to lend money direct into their offset account. The kids could pay you, maybe 1.5% interest, which is better than you’ll get with most savings accounts, and your child is still 1.0% ahead on their mortgage rate.
The key to all this is that your children are managing their money responsibly, because quite frankly, handouts rarely encourage good financial habits.
That said, for parents heading into retirement, your top priority should be making sure your own financial wellbeing is in great shape. 2020 has shown all Australians how important it is to have some emergency savings, and no one benefits if the Bank of Mum and Dad goes belly up.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.