Worried that you won’t be able to give your family a helping hand in life without dipping into your retirement savings?
It’s normal to want your kids to be financially comfortable in life, but rising costs of living may be making that more difficult by the day.
Factor in higher life expectancies than previous generations and your retirement savings might already be stretched too thin to lend your family any kind of financial support.
If you’re concerned your kids won’t be able to buy a home or have enough to fall back on if times get even tougher, you’re not alone. Depending on your goals, here are a few ways you could help your adult children get ahead without derailing your chances of a comfortable retirement.
Acting as guarantor
The Bank of Mum and Dad has stepped in to help thousands of Australians get their home deposit over the line, but there are ways to help your kids buy property that don’t involve giving up a large chunk of your savings. One option is to become a guarantor and use the equity in your home as security for your kid’s loan.
While this might seem preferable to parting with cash savings, there are a number of risks you’ll need to take into account. One of the main ones is that if your kid is unable to service their mortgage, you’ll be on the hook for the amount you guaranteed — and for many well-meaning parents, this has resulted in them losing their home. If you do decide to go guarantor, make sure you ask to be released from the guarantor arrangement once there is sufficient equity and your security is no longer needed.
Put money in their offset account
If your son or daughter already has a mortgage, one way you could make their life easier is by considering keeping a portion of your savings in their offset account. Every dollar held in one of these reduces the balance on which interest is charged, so by topping up your child’s offset account you could help them save money and potentially shorten the life of their loan.
Of course, the downside is you’ll lose out on any interest you could have earned by investing that money or keeping it in a savings account or term deposit. You’ll also need to have clear guidelines around how accessible your money will be and how long this arrangement will be in place.
You should also keep in mind that if you receive Age Pension payments, you may need to advise Centrelink whether the money held in your child’s account is a gift or loan. Loans will be counted as a financial asset, while gifts in excess of the gifting limits are counted as a financial asset for five years. Consider hiring a solicitor to document the arrangement (more on that below).
Loaning money instead of gifting it
Whether it’s to help them buy a home, start a business, or cover your grandchildren’s school fees, you might want to consider lending your kids the money instead of gifting it. This goes doubly so if you receive the Age Pension, since you’ll face limits on how much money you can gift without your pension payments being affected.
To help prevent any misunderstandings — and safeguard your retirement savings in case of any disputes — it’s a good idea to have a Deed of Loan drawn up by a solicitor. This should spell out the amount, term, and purpose of the loan, along with whether or not any security has been provided. Without a written agreement in place, the loan might be presumed to be a gift and you could find that you’ll have a hard time retrieving it should matters go to Family Court.
Let them move back home
Rising rents have put a significant dent in many Australians’ finances, not to mention made it harder for young Australians to purchase a home of their own. If you own your home outright and have enough space, inviting your kids to move back home can be just what they need to get their finances on track.
According to property research firm CoreLogic, the average weekly rent in Australia is currently $570. Eliminating that expense for just a year can put thousands of dollars back in your kid’s pocket, and make other expenses such as groceries much more manageable.
But before you let them return to the nest, make sure to establish clear boundaries and expectations. Whether or not they will be chipping in for groceries and utilities, doing chores, or paying a small amount of rent should be discussed upfront to minimise any conflicts down the track. It might also be helpful if you both decide on a move out date — say, six months — which could provide that extra little bit of motivation for them to improve their financial situation.
Encourage savvy financial habits
Lastly, one of the best things you can do for your kids — no matter what age they are — is help them see the value of budgeting, saving and investing. Investing in particular can be one of the most consequential things you can do. The sooner your kids understand this, the sooner they might be able to reap the benefits of compound interest and build their wealth.
As always, consider seeking professional financial advice before implementing any of these ideas. While both you and your kids deserve to be financially comfortable, you don’t want to introduce too much stress into your life, especially if the solution doesn’t match your objectives, financial situation and needs.
Contact Carrick Aland’s award-winning Wealth Planning team on 1300 466 998 or visit carrickaland.com.au/wealth-planning/.
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