It’s common for adult children to ask their parents for financial aid, even if you’ve worked hard to raise your kids to be self-sufficient. While it may be your instinct to want to help your child, you need to consider how your child’s request for help could impact your own retirement plan. Here are some guidelines that can help you avoid potential pitfalls should you find yourself in this situation.
Best intentions. Debt collection is hard enough. Collecting money lent to your own child risks potentially damaging the relationship, so proceed with caution. Be transparent about where the loan money came from and set clear expectations for how you expect it to be repaid (lump sum or installments) and a deadline for repayment. Consider if there are penalties for failing to meet the loan terms (i.e., will the loan begin to accrue interest, etc.).
Depending on your relationship and the amount you’re lending, you may want to use a promissory note, which documents the amount lent and the repayment terms. Even if it seems like an uncomfortably formal step, a promissory note can help you recoup the money, particularly if, heaven forbid, things deteriorate to the point where you need to go to court. Just don’t forget that all parties need to sign.
Focus on the essentials. Limit your help to paying critical bills, like health insurance or the mortgage. Consider focusing on those debts that impact their credit score to keep their score in a good place while they work towards getting back on their feet. Be clear about how much money you can provide or how long you can help them meet these payments – they need to understand you can’t help forever.
It’s your home. If you allow your child to move back home, make sure they know what you expect before moving in. Consider a written agreement that outlines rent and expectations for help with household upkeep. One idea is for parents to let their kids stay at home for a given number of months, then begin to charge rent after that. Set a target end date or conditions that would necessitate the child to move out, such as finding a job at a specific income level.
Break the habit. If your child’s routine is to always turn to you for help, you both have to break the habit. Work with them to see if there are other options – like a traditional loan or debt reduction plan – that would provide them some relief without tapping into your savings. For you, work on setting some money boundaries. It can feel like you’re “cutting them off,” but look at it as helping them learn to stand on their own (just like when they were little!).
Before any money changes hands, the first step should always be an open, honest, and realistic conversation. Often, that step alone is enough to find a mutually beneficial solution and avoid any unpleasantness.
More than anything, remember that it’s your money and your decision. We’re here to help however we can. Please contact our office if you’re considering using your retirement account to loan your child a significant amount of money.