Is your retirement at risk from your children?

For individuals approaching retirement, there is a strong focus on managing risks as they transition away from continuous paid work. A common focus for many people is longevity risk, i.e. the risk of outliving their retirement savings. One effective strategy is to increase their concessional super contributions, placing more wealth in high-returning growth assets. However, this also raises sequencing risk, or the risk associated with the volatility of superannuation investment performance from different asset classes.

A well-balanced retirement plan adeptly navigates these risks, adjusting superannuation strategies as market conditions evolve. Other common risks include health issues, legislative changes, and other external factors. Some can be controlled, others not.

But a new risk that is becoming more and more prevalent in Australia today is the financial reliance of adult children on their retired parents.

Times of need

Many people nearing retirement are empty nesters. They have had a family, but now their dependent children have grown up, left home, and live their own, ostensibly financially independent lives. However, a growing trend shows adult children, long out of the home, returning to seek financial support from their retired parents. 

It’s not easy out there. Maybe kids need help buying their first home in an increasingly tough market, or assistance with rising childcare costs to enable both parents to work. Recently, sharp rises in interest rates, coupled with many new homeowners transitioning from fixed to variable rates, have also left many young families struggling with escalating mortgage payments. It could even be a sudden illness or serious injury to a grown child, where their income or assets have not been adequately protected, that sees them seeking assistance to get them through until they’re back on their feet. Whatever the reason, there is a rising prevalence of adult children turning to elderly parents and their superannuation investments to help them cope with financial challenges.

The Bank of Mum and Dad

This support might come in many forms. Adult children might temporarily move back home to save money, pay off debts, or save up a house deposit. New retirees might put their own life plans on hold to offer care for grandchildren, enabling their parents to work. But the most common form of support is direct financial assistance, including providing a lump sum, income support, or acting as a guarantor on a loan. 

Each of these comes with significant financial implications for retirees who are reliant on their superannuation and accumulated assets, and it’s important that parents carefully consider their own financial circumstances. 

Of course, we all want to help our children if possible, but at what cost to ourselves? In a recent column for ‘The Nightly’, finance expert David Koch noted that the “Bank of Mum and Dad” provided more than $2.7 billion to adult children last year. It makes this venerable institution between the 5th and 9th largest mortgage lenders in Australia, with an average loan amount of around $80,000 per adult child.

Clear boundaries help children to help themselves

In his article, Koch advises against informal payments, recommending that people treat these individual loans as clear business transactions, with formal agreements and a rigid repayment schedule. 

Sometimes, financial help is sought by adult children who have made poor financial decisions. This can lead to a cycle where parents bail out their child, only for the child to repeat their mistakes. So, formalising the arrangement not only helps teach better financial decision making in the future, but is important to mitigate the risk of elder abuse resulting from parental financial assistance. Everyone thinks it won’t happen to them, but Koch highlights a study by the University of Newcastle that reveals the increased risk of elder abuse in Australia today.

Protecting your own financial security

If you are fortunate enough to have substantial assets in retirement and a healthy superannuation balance, you might be able to provide this type of support without adversely impacting your own financial security. However, many retirees may not have sufficient assets for the level of support their children are asking for, or at least did not anticipate such needs when planning their retirement funding. 

Even if your kids are struggling financially, it’s important to consider who will support you as you age if your own financial position were to become compromised.

Working with a trusted financial advisor can help you explore all opportunities and risks when preparing for or managing your retirement. If your children do come back to you for financial support, and you feel you’re in a position to help out, a financial advisor can offer clear advice and guidance that’s free from emotive bias to mitigate risks, and also ensure that any financial support that’s offered to family is given in a tax compliant and tax efficient manner for both parties. 

Rely on expert advice

At LDB, our expert wealth management team can support any decisions you make with sound financial planning advice, helping you to offer financial assistance that’s practical, without reaching too deeply into your superannuation balance and putting your own future at risk. Our friendly advisors can present clear and transparent options, giving you the tools you need to make a sound financial decision, as well as giving your children as much support as you can. 

Contact us by phone on (03) 9875 2900 or submit an enquiry through the contact form on this page to have a conversation with an expert.