Should You Give Financial Support to Family?
Robert Powell, CFP®
About 24 million Americans have provided financial support to adult children due to COVID-19, and an overwhelming 71% of retirees said they would offer financial support to their family even if it could jeopardize their financial future, according to The Four Pillars of the New Retirement, an Edward Jones and Age Wave study.
The research also reveals that 20 million Americans stopped making retirement savings contributions during the COVID-19 pandemic and only a quarter of working Americans were on track with their retirement savings before the pandemic. What advice might you have for these Americans? I plan to print your comments verbatim on Retirement Daily.
Given these findings, Retirement Daily asked members of the Financial Planning Association to offer words of wisdom to those Americans who plan to offer financial support to their family, as well as those who have stopped making retirement savings contributions. Here’s what they had to say.
Normally we tell clients to take care of themselves first and let the adult kids struggle a bit, especially if it’s jeopardizing their retirement. But these are different times, and we’re all in this together. My 24- year-old stepson, an at-risk guy, has been living with us for four months. You do what you have to do to help your kids.
Second, please contribute to your matched 401(k) if you are still employed. But if not, don’t fret. Life isn’t linear, and setbacks occur. Stay positive and flexible, keep your expenses under control, and this, too, shall pass.
I certainly understand the desire for parents to help their children in a time of crisis. That's what we do as parents; we sacrifice. But in times of crisis, it is wise to follow the same philosophy as an airline's pre-flight safety announcement. You need to secure your mask first before assisting your child.
Parents who provide financial support to adult children due to COVID-19 should cut down discretionary expense items in their cash flow to help out rather than raiding their retirement savings. Consider helping your adult children with an intra-family loan, rather than a cash gift. With current interest rates at historic lows, intra-family loans are an advantageous way of assisting family members and a means for you to get paid back over time with gratitude. The payments can start small and later increase, as your children hopefully find their footing. Do not feel guilty about making your child pay you back.
And, if you are worried you may not have sufficient retirement savings, consider postponing retirement or returning to work, even part-time. Working longer enables a person to delay withdrawing retirement savings and reduces the number of years in retirement. For every year in which someone puts off taking Social Security between ages 62 and 70, benefit checks increase by about 7% to 8% after inflation.
Also, if you are challenged to ramp up retirement savings, then you can rebalance your current portfolio's asset allocation to use winners after major market upturns to cover expenses. By subsequently shifting money into depressed assets, rebalancing helps a portfolio recover faster amidst a market turnaround so that your total portfolio can be on track with what you will need for your retirement.
The human impact on families as a result of the government's reaction to the virus is staggering. Many family members who still have income or assets will help other family members who do not. It will be important for them to replace their savings when the pandemic is over. Many who were still employed discontinued contributions to retirement plans from COVID fear, and the precipitous drop in equity markets. Many more may have "gone to cash," and missed the rally in April and May. We have seen the child of a client who lost their jobs sell their home, and move in with their parents. The best counsel is to work with a CFP to see what steps are necessary to get back on track with their retirement plans. It will take sacrifice.
I would never tell a client not to assist their family or loved ones. It is so important to approach these conversations with empathy. Here is the advice that I think can be helpful. If a client's family member has experienced a loss of income or reduction of income, of course - the client would want to help. Financial planning or revisiting the client's financial plan can help the client understand the impact the "help" would have on their situation. For example, maybe the client can't help pay the entire mortgage until his/her family secures full-time employment, but the client can provide $500 per month support for six months or $1,000 per month for three months. In other words, a conversation about both the amount and duration can help guide the client.