It’s always hard to say “no” to your kids, from when they’re little and want one more bedtime story to when they’re adults looking for help to pay the rent, buy a car or purchase their first home.
With less job stability, the rising cost of living and skyrocketing rent and housing prices, it’s no wonder so many millennials and Gen Z adults are turning to the “bank of mom and dad” for financial support.
A recent CIBC survey shows parents are giving their kids larger financial gifts to buy the first home, or an average of about $82,000 in 2020, up from $52,500 in 2015. Also, about 30 per cent of first-time buyers got help from parents last year, up from around 20 per cent five years earlier, the survey shows.
“People have a hard time saying ‘no’ to their kids,” especially as they point out the challenges they’re facing today, says Julia Chung, a senior financial planner with Spring Planning in Vancouver.
It’s not an issue, Ms. Chung says, unless it puts parents’ retirement and financial security at risk.
Ms. Chung has had clients who gave money to their adult kids and then ran into financial trouble in their retirement, despite her best efforts to show them the risks of doling out the cash.
”There’s only so much anybody can do,” Ms. Chung says.
She’s also had clients come back and tell her they made a mistake by forking over the funds for the kids, and needed to work with them to figure out a new financial plan.
Parents need to think carefully before automatically agreeing to a cash request from their adult children, says Rona Birenbaum, a certified financial planner and founder of Toronto-based fee-only financial planning service Caring for Clients.
”One of the first things is to take time to consider the request,” she says. “[It] gives the parents time to consider if it’s something they can afford to do, whether it’s something they want to support [and], to consider any possible ripple effects.”
A little time also helps parents figure out what to do if they have other kids who might ask for money, too, down the road. For example, she says many parents will want to ensure their kids get equal sums over time, which will require careful planning in advance.
Parents who do agree to give the money should also be sure to ask questions about the request, Ms. Birenbaum says, including what the funds are for (if they don’t already know), how much they really need, and when. It could turn out that the kids don’t need as much money as they’re asking for, or they might not need it as soon as they think – which gives parents more time to consider the request.
Suppose it’s money for a big-ticket item, like a down payment on a home. In that case, Ms. Birenbaum says parents will need to consider whether the adult child can afford the additional costs, including the rest of the down payment, closing costs, the monthly mortgage, and other expenses. If the answer is no, then the handout could do more financial harm than good long term.
”The parents have to first determine if it’s really affordable through a financial planning exercise,” Ms. Birenbaum says. “It’s a first step, because then they can give the money freely without hesitation, without judgment, without regret.”
Laurie Bonten, a senior vice-president and senior investment adviser with Wellington-Altus Private Wealth Inc., says many parents today want to support their children as much as possible while they’re alive.
The problem, as Ms. Chung also noted, is giving too much too soon and sacrificing their retirement lifestyle later on.
“[Parents] have to downsize or can’t afford the retirement home they might have normally had,” Ms. Bonten says.
To avoid handing over too much money, or hurting anyone’s feelings if you can’t help, Ms. Bonten encourages parents to include children in the discussion with the adviser to show how the gift will impact their retirement savings.
The planner will run the numbers to show what assets the parents have now, their expected spending in retirement and their life expectancy, to ensure they have enough money. Then they’ll run another plan excluding that money the adult child has requested.
The results could be eye-opening for both the parents and the children, especially if it means the parents will be shortchanged in retirement.
“I think you need to give the hard facts, the tough love with the parents,” Ms. Bonten says. “If you involve [the adult children] in the planning process, most children will look at it and say, ‘mom and dad, I don’t want you to not have your retirement.’”
The adviser can then potentially help the adult children with their own financial plan and find other ways to meet their goals, such as borrowing money with the parents’ co-signing the loan.
Ms. Chung also recommends parents treat money requests as a “financial teaching opportunity” for adult children and be honest about the potential financial ramifications.
”At the end of the day your kids do care about you,” she says. “They want you to be okay.”