TORONTO — In a world where home prices are soaring and the cost of living is rising, many parents want to help their adult children financially. But experts say parents need clear guidelines before they go to mom and dad's bank to ensure their children don't put their retirement at risk.
“Without boundaries, parents can be left in a precarious position,” says Sarah McCullough, a financial planner and owner of WD Development.
Parents need to decide whether they can afford it or are willing to put themselves at risk in the future, she says.
It's not uncommon for parents to help their adult children with monthly living expenses and a down payment on a home, but with the affordability crisis hitting every generation, experts say parents should be careful before lending financial products to others. warns that people should first consider their own retirement plans and establish reasonable boundaries. hand.
McCullough's practice often helps parents who are worried about their child's unpaid bills or a lifestyle they can't afford.
“Parents came up to me and said, 'We're trying to help these kids. They can't keep their heads up,'” she said.
“I will discuss this with parents and make it clear to their child that they will try it once.”
Over the past two years, financial headwinds have hit Canadians hard. Inflation is at multi-decade highs, borrowing costs are rising, and although house prices are falling, they remain extremely unaffordable for many people. Rental prices have also skyrocketed. Meanwhile, wages have increased by about 5%, but still have not kept up with prices.
And with food and housing taking up a large portion of monthly budgets, families can struggle to find the money to pay for child care, utilities and clothing, let alone vacations.
Parents who are willing and able to support their children financially need to start by setting boundaries, McCullough said. It can be different for each family, but establishing the nature of the assistance from the beginning lays the foundation.
Parents need to be clear whether the money is a one-time gift or regular help with bills, loans, etc., she says.
She added that if the money is to be used to help a child, parents should seek professional help to prevent their child from being in the same situation again. “It's a conditional gift.”
She detailed one of her clients who was helping her adult children pay their monthly bills.
“(The parents) were sending money every month to their adult children, who were in their 30s. The son was married and had two children,” McCullough said.
“This effectively means that the child was earning 33% more than he or she would have earned on their own,” she added. The monthly remittances encouraged the adult children to move to a bigger house and plan to have a third child, and her wife considered becoming a stay-at-home mom.
But his parents planned to retire within three years, McCullough said. Post-retirement transfers will eventually cease, but all this is when children don't know how their parents feel about their financial health.
“What happens when the money runs out?” she asked. “Right now, we have two families struggling with money.”
Stephanie Kotzopoulos of Toronto-based Basis Wealth agreed that having open communication about finances is key, and that professional help can make it smoother.
“Get that clear at the beginning,” said Kotsopoulos, a financial planner and partner at the firm. “It's hard for other people to know what you're thinking, so in situations like this…I think it's important to have the conversation.”
She suggested providing independent legal advice to both parties when helping parents make a major purchase, such as buying a home. This ensures that both parties are protected.
If parents don't feel comfortable giving money, Kotsopoulos says they need to be able to respectfully explain this to their children. Similarly, adult children should be able to ask questions if they have any.
Parents also help their adult children with their daily living expenses, such as paying for their grandchildren's extracurricular activities or unexpected expenses such as car repairs that they pay on credit cards.
McCullough said parents may not always know what the money will be used for because of the varying nature of how small but unexpected expenses can accumulate on credit.
Each relief situation, she added, is an opportunity for adult children to understand the financial consequences of not helping their parents.
It all depends on what parents feel comfortable with and knowing they won't jeopardize their plans, she said.
“As we live much longer, we may need to finance ourselves by our 90s, perhaps even longer than our actual working years.” Kotsopoulos pointed out.
Parents should be able to envision and plan for a healthy retirement before deciding to help their adult children, she added.
This report by The Canadian Press was first published Feb. 27, 2024.
Ritika Dubey, Canadian Press
