Set boundaries before opening bank of mom and dad, experts say
TORONTO — In a world of skyhigh home prices and rising cost of living, many parents are inclined to financially help their adult children. But experts say parents need to lay out clear guidelines before their children tap the bank of mom and dad to ensure they don’t put their own retirements on the line.
“If there [are] no boundaries, the parents can put themselves in a shaky position,” said Sara McCullough, a financial planner and owner of WD Development.
Parents should assess whether they can afford it or if they’re going to put themselves at risk in the future, she said.
It’s not uncommon for parents to help their adult children with monthly bills or a down payment for a home, but as the affordability crisis hits all generations, experts warn parents should first look at their own retirement plans and establish reasonable boundaries before lending others a financial hand.
In McCullough’s practice, she often helps parents who are concerned about their kids’ outstanding bills or lifestyle they can’t afford.
“Parents have come to me and said: ‘We’re thinking of helping our kids. They got in over their head,’” she said.
“I will talk to parents about making it clear to the child, ‘We’ll do this for you once.’”
Over the past two years, financial headwinds have hit Canadians hard: inflation was at decades-high levels, borrowing costs jumped and while home prices have moderated, they’re still wildly unaffordable for many. The cost of renting has also surged. Meanwhile, wages have grown at a roughly five per cent clip but are still playing catch-up to prices.
And as food and shelter costs eat up a bigger slice of the monthly budget, families have sometimes struggled to find the money for child care, utilities and clothing — let alone a vacation.
Parents willing and able to help their children financially should start with boundary-setting, McCullough said. It could look different from family to family but says establishing the nature of help from the get-go lays the groundwork.
Parents should be clear about whether the money is a one-time gift, recurring help with bills or a loan, she said.
If the money is being used to bail out their child, she added, parents should push their kids toward professional help so they don’t land in the same situation again: “That is a gift with strings.”
She recounted one of her clients helping their adult kids with monthly payments.
“[The parents] were doing a monthly transfer to their adult children in their ’30s. The son was married. They had two children,” McCullough said.
“That effectively meant the child had 33 per cent more income to spend than what they were bringing in on their own,” she added. The monthly transfers convinced the adult kid to move to a bigger house and plan a third child while the wife contemplated becoming a stay-athome mother.
But the parents were going to retire in three years, McCullough said. Transfers would’ve eventually stopped after retirement — all when the kids were unaware of how their parents felt about their own financial health.
“What’s going to happen when you run out of money?” she asked. “Now we’ve got two families out of money.”
Stephanie Kotsopoulos of Toronto-based Basis Wealth agreed that having open communication about finances is key, and professional help could make it smoother.
“Make that clear initially,” Kotsopoulos, a financial planner and partner at the firm, said. “It’s hard for other people to know what you’re thinking, and so I think that in these types of situations … it’s important to have those conversations.”
She suggested involving independent legal advice for both sides if parents are helping with a big purchase such as buying a house.
This would make sure both parties are protected.
If parents aren’t comfortable with giving money, they need to be able to explain that to children respectfully, Kotsopoulos said. Similarly, if adult kids have questions, they should be able to ask.
Parents are also helping their adult kids with day-to-day expenses, such as paying for their grandkids’ extracurricular activities or unforeseen expenses like car repairs that would otherwise be put on a credit card.
Because of the miscellaneous nature of small but unforeseen expenses piling up on credit, parents might not always know what the money goes toward, McCullough said.
With every bailout situation she added, it’s an opportunity for adult kids to understand the financial consequences if parents weren’t there to help out.
It all comes down to what parents are comfortable giving, and knowing they’re not risking their own plans, she said.
“Because we’re living a lot longer … you’re potentially needing to fund yourself into your ’90s, maybe even for longer than your actual working years,” Kotsopoulos pointed out.