The kids are all grown up and starting their own careers and families. For many parents, this stage of life brings freedom from the financial responsibilities of raising children. For others, however, the desire – or need – to continue helping out financially doesn’t stop when their children become adults.
“Some parents feel a moral obligation to provide for their children and even their grandchildren,” says Richa Hingorani, senior manager, financial planning support, RBC. “It’s a generous sentiment – it’s also one that may have an impact on their retirement.”
While there’s no hard data tracking how many parents provide for their grown children and grandchildren, Statistics Canada suggests a significant proportion of adults may be financially dependent on their parents. According to the 2011 census, more than 42 per cent of Canadian adults aged 20 to 29 lived in their parents’ home. StatsCan also reports that about 600,000 grandparents live in the same home as their grandchildren, with about half bearing some responsibility for household payments. This suggests that many provide some financial support to their grandkids, says StatsCan.
“There are cases where parents are financially supporting their children, as well as their children’s children,” notes Ms. Hingorani. “This could leave the parents with very little by the time they retire, so they need to really think about when and how they should help.”
Parents with boomerang children – a term coined to describe adults who have come back to live with their parents – should sit down to discuss the terms of their kids’ return to the family home, adds Ms. Hingorani.
“Have a discussion around issues like how you and your child will share living expenses and other things that you’re paying for currently,” she advises. “And set a date for when the child will move out. That’s really important, because it makes it clear that this is not a permanent arrangement and that the adult child needs to have a plan for becoming financially independent.”
It’s also a good idea for parents to come up with ways to support their kids that don’t involve cash, says Ms. Hingorani. This may mean sharing a car with a child who needs to drive to work or making home-cooked meals that can be packed as workday lunches.
In some families, there’s an expectation that mom and dad will help out with big expenses such as a wedding and a first home. Cherise Berman, a fee-for-service adviser with Bespoke Financial Consulting Inc. in Toronto, advises parents to consider loaning funds for these big-ticket expenditures instead of giving the money as a gift. Ideally, money lent to children should be backed by a formal loan agreement.
“In this way, the kids are still getting help, but it’s not a free ride,” she explains. “Whether or not the parents charge interest is up to them; I would imagine that in many cases the interest would be lower than what the banks would offer or there would be no interest at all.”
For those who want to give cash gifts to grandchildren, Ms. Berman suggests contributing money to a Registered Education Savings Plan (RESP), in consultation with the child’s parents. Another option is setting up a trust fund, which can be a tax-effective way to share wealth with grandchildren, adds Ms. Berman.
“There are costs to set up the trust, as well as accounting and legal fees,” she says. “But there can be tax advantages to setting up a trust fund with your grandchild as beneficiary.”
Whether they’re helping out their kids or grandkids, parents need to determine how their financial generosity could affect their ability to retire comfortably, says Ms. Hingorani. And in order to do this, she adds, they need to have a retirement plan in place.
“Without a retirement plan, it’s hard to tell how much you can spend on the kids or grandkids in the short and long term,” she notes. “I think it’s great when parents want to continue helping, but they need to make sure they’re also taking care of their own financial needs.”
This article originally appeared in the Globe & Mail in January 2016.
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