When parents become the emergency fund
Financial fallout from the pandemic is hitting millennials hard — and many will soon turn to their parents for help, if they haven’t already.
Before parents ride to the rescue, financial planners urge them to map out a strategy that doesn’t just plug a short-term need but also makes sense in the long run.
“Often the heartstrings will get pulled — ‘I really have to help them!’— but it can be detrimental to the parent,” says certified financial planner Jeffrey Corliss of Westport, Connecticut. until Sept. 30, and incomedriven programs can reduce payment amounts after that.
Another option is a coronavirus hardship withdrawal, which allows people to tap their IRAs and 401(k)s without penalty if they were physically or financially affected by COVID-19. The withdrawals are taxable, but if the money is paid back within three years, those taxes are refundable.
While your kids are filing for unemployment and calling their lenders, take a moment to assess your own finances. Where will the cash for your kids come from? It’s one thing to give away money you’ve been saving for a vacation, since you’re unlikely to travel soon anyway. It’s quite another to undermine your own ability to retire or handle a layoff or other setback.
Some parents make a conscious decision to operate with a smaller cushion, or to delay their retirements, to help their children, says CFP Lazetta Rainey Braxton in New York. Just keep in mind that you may not get to decide when you retire. Many workers retire earlier than expected, often because of a health problem or job loss. Helping your children now could mean you have to lean on them later, Braxton says.
Financial planners typically recommend deciding how much to give and then setting clear boundaries about when the financial help will end. That’s tricky now, of course, because no one knows how long the current economic crisis will last.
But parents can still set expectations in other ways, financial planners say. If the child didn’t have an emergency fund, for example, parents can discuss the importance of saving money out of every future paycheck, so the child won’t have to rely on family help again, Braxton says.