The Bank of Mom and Dad Needs a Lending Policy

A dollar sure doesn’t go as far as it used to. With education costs rising, housing prices growing further out of reach and the cost of living steadily marching higher, many families are providing support to younger generations even after they reach adulthood. 

More than a third of pre-retirees have provided significant financial support to family members, with the average gift coming to more than $26,000 and most often going to adult children, according to joint reports from the Center for Retirement Research at Boston College and Jackson National Life Insurance Company. Supporting the kids may feel right, but it can affect retirement savings. Preretirees who gave financial support to family are, on average, 54% of the way toward meeting their retirement goals, compared to 66% of those who did not, the report found. For advisors, it’s a reminder that any intended giving needs to be thoughtfully evaluated. 

“There’s certainly a fine line. … If you’re not careful, unfortunately there can be a tipping point where you end up becoming dependent on the charity of others,” said Vincent Birardi, senior wealth advisor at Halbert Hargrove. “We spend a lot of time understanding exactly what those parameters are, what their intentions are and making sure that if we do proceed with any level of gifting, that it’s done with very careful and thoughtful consideration.” 

Define the Dollar

When approaching conversations about family giving, it’s important to define the intent and extent of the commitment, said Tom West, managing senior partner at SEIA. “I always like to use language, ‘What is the job of the money?’” he said. That job should have a start date, end date and measurable goal, he said. “Were we able to afford college? Were we able to make rent? Were we able to recover from a medical bill?” 

This is especially important given that support is often not a one-time gift, per the survey: 

• Of those who previously provided significant financial support, 76% expected to do so again. 
• It’s not just the initial cost of the gift. The average gift of $26,000 could become more than $150,000 over 30 years if invested. 

A House Divided. An underappreciated complication of providing financial support to family is when two spouses aren’t on the same page about how much they want to give, said West. “That happens more than I think is appreciated,” he said. “Both spouses really need to have a shared consensus about support for kids if they want to minimize family friction, not just in their marriage, but more broadly down the road.”