How Retirees Can Help Prepare for Family Emergencies
We retire from careers, not being parents or grandparents. So, how can retirees help provide a lifeline to children without sinking their retirement?
You don’t have to look very hard to find articles warning parents not to jeopardize their financial futures for the sake of their adult children.
Yet, these are uncertain times. Millions of people are unemployed, which may leave many adult children seeking help from their retired or nearly retired parents.
There are several instances where adult children may seek the support of their parents, including:
- College tuition
- Job loss
- Car repairs
- Divorce
- Medical expenses
- Pre-bankruptcy/foreclosure
It’s a difficult situation, where the parents must often weigh their children’s short-term challenges with the longevity of their retirement nest egg.
“Caring for adult children and grandchildren can be an unexpected retirement expense, which can place retirement plans in jeopardy.”
— Eric Stratton, Heyday founder
Helping Has the Potential to Hurt
According to a recent study by Pew Research, the overwhelming majority of adults in all age groups agreed that Americans spend too much on their children ages 18 - 29.
And research by Bankrate found 50% of Americans are sacrificing or have sacrificed their own retirement needs to help their adult children.
There’s nothing inherently wrong with wanting to help a child in need. However, without proper planning, it may set off a chain of negative financial outcomes:
- The retirees could run out of money sooner than planned, and must rely on their adult children later in life to help support them financially.
- Having to take care of their parents may reduce how much their adult children can save for their own retirement.
- In turn, the retirees’ adult children may have to rely on their own kids during their retirement years if they don’t adequately save.
Potential Costs of Helping Out Adult Children
The costs to help out adult children or grandchildren will depend on many variables, including where they live. Average expenses for certain scenarios include:*
Because these situations are likely unplanned, retirees may not have budgets allocated for them. To cover the costs, they may:
Make extra retirement withdrawals - some may resort to taking additional withdrawals from retirement accounts to cover large expenses for adult children. These withdrawals may have a one-two punch for retirees — having to pay taxes on the extra “income,” as well as potentially running out of money later in retirement.
Take on debt - whether it’s a credit card, loan or line of credit, borrowing money to help support adult children or grandchildren can cost retirees more when you factor in interest rates and years of payments that could dig into their monthly budget.
Reduce their discretionary spending - retirees could choose to slash their monthly expenses and redirect their discretionary income to help solve their children’s financial issues. Putting their lifelong dreams on hold now may mean they'll become delayed indefinitely due to lack of income, declining health, or both.
Consider this example:
Retirees, Steve and Teresa, have three adult children and five grandchildren. Their youngest son, David, developed an opioid addiction after a knee replacement surgery. Now he needs rehab. Of course, they will do whatever they can to get him treatment, which will cost approximately $17,000. How should they pay for it?
- Take out a mortgage or home loan?
- Put the balance on credit cards?
- Live off of Teresa’s Social Security check alone and save Steve’s monthly benefit to pay for treatment?
- Deplete their emergency fund?
Once those financial decisions are made, Steve and Teresa’s retirement lifestyle will most likely pay the price, one way or another.
While no one can predict when a child or grandchild may need us, there are actions retirees can take now to help prepare, just in case.
Determining how at-risk their nest egg may be to retirement risks is a great place to start. Free online assessment tools like Heyday’s Custom Retirement Review can help empower retirees to understand their risks.
Ready to see where your savings may stand against the risks you’re concerned about facing? Try the free online assessment here.
*Sources:
Moving back in with parents: https://porch.com/resource/leaving-the-nest
Rent for 2-bedroom apartment: https://www.apartmentguide.com/blog/apartment-guide-annual-rent-report/
Used car: https://www.statista.com/statistics/274928/used-vehicle-average-selling-price-in-the-united-states/Divorce: https://www.thestreet.com/personal-finance/education/how-much-does-divorce-cost-14882536
