When financially bailing out your family backfires

Usually when people reach retirement age they find they are financially comfortable - and that's a great thing. It means you've worked hard all your life and you've put away sufficient funds to provide for yourself.

Retirement should be a time to relax and enjoy your life and family. Sadly, the best-laid plans can go astray and the cause can be the people who love you most: your family.

Family members are quick to notice that if you are able to provide for yourself in retirement, you must have a stash of cash somewhere. The temptation, then, for family members is to "relieve" you of some of that cash.

This plays on the natural parental instinct to provide for and help your children. The cash is there within easy reach, your children have a need and so you draw down a percentage of your retirement savings.

It's so easy. It's so tempting. It's so bad. It should be resisted at all costs.

Focus on what giving away a chunk of cash might do to you and your chances of successfully funding your retirement right to the end. Think about the final years of your life and what it would mean if you ran out of money and only had the age pension to rely on.

It's a situation you wouldn't enjoy, and you'd enjoy it even less if you knew the reason you're in that situation is because of decisions you made earlier in retirement to give your children a bit of financial help that they might not even remember.

To be forewarned is to be forearmed, so I will run through the more common traps. This may not stop your family from taking advantage of you, but hopefully you will make better decisions in terms of helping family members out financially and so minimise the adverse impact doing so might have on your retirement.

Of course, none of this applies if you own considerable assets when you retire and can afford to give away chunks of money.

The challenge then is to transfer some of your assets to your children in a way that is fair and transparent so if you have several children none of them feels overlooked or slighted. This can be a difficult road to tread. If you have a caring family solicitor, you should involve them to ensure your wishes are abided by when you pass on.

A good solicitor will alert you to the risk of helping your children financially and then later finding them caught up in a financial crisis such as an acrimonious divorce. You might, in good faith, give or lend money to a child to help them pay off or reduce their mortgage only to discover their former partner is entitled to the family home and other assets paid for with your money.

Even if you have significant savings in retirement, tread carefully before you start handing cash to your children. Think before you act and get good legal advice. Ensure you tell all your children what you are doing in a fair and transparent way very early on or you might lay a minefield the family walks through at every family gathering thereafter.

Lesson worth learning

Australians are marrying and starting families later in life. While parents starting second families in their late 50s and early 60s remain an exception, it is common for retirees to have children in tertiary education.

Unless your child has been lucky enough to secure a scholarship to university, they will pay for their own education and most likely will incur a HECS debt. Many parents feel the urge to pay these debts, but unless you have significant assets set aside for retirement - and by that I mean millions of dollars each - you should refrain from doing this.

Dipping into your nest egg to pay children's HECS debts can open a door to your precious retirement savings that can be extremely hard to close.

Once your children sense there is a stack of money sitting somewhere and that with a bit of pressure they can get hold of some of it, doing so will quickly become a habit. This goes against all the best tenets of good parenting, which say you should encourage your children to stand on their own two feet both financially and emotionally.

It also means your finances will be discussed at the family meal table and at other social occasions when it is clearly not appropriate to do so. It will become a nuisance and will slowly build from being a petty annoyance to something that regularly starts arguments and disharmony in your family.

Whenever you might be tempted to pay your children's debts, think again. Having seen more than one family implode over these sorts of financial issues, I can tell you it's not worth it. It's particularly not worth it over a HECS debt. Of all the debts your children might incur, this is the one you should encourage them to face up to and pay.

For many, it will be their first taste of a financial obligation. Owning the debt will encourage them to prize their education, ensure they make the most of it and not hop from one tertiary course to another. It's also an important step for them to recognise they are part of a wonderful country and have a social obligation to give back as successful young adults.

So, as tempting as it is to help out with a HECS debt, you should avoid this, especially if it means dipping into your retirement savings.

If you choose to stay in the workforce and work, say, an extra year to pay off your child's debt, that's another thing altogether. That's your choice, and it won't adversely impact your retirement. In fact, such a decision will help improve your financial position in retirement as you will have another year of contributions in your super account.

Beware the house trap

Next on the list of activities that can easily undermine your plans to fund your retirement is helping your child buy a home or, if they are already in a home and paying a mortgage, reducing the burden of that debt. This can become a pressing issue if that child finds themselves in financial difficulties.

It can be hard not to step in and help. Again, you should resist the temptation.

Buying a house is a big financial responsibility and too often Australians think it is a guaranteed way to make money. It's not. Even buying your own home can be full of difficulties and you need to be really committed to make it work.

Encouraging a child to take on the responsibility of owing hundreds of thousands of dollars if they are not ready to do so is in many ways setting them up for failure. In fact, in some situations I've witnessed, I've wondered if that was the parent's intent: to set the child up for failure just so the parent can swoop in and rescue them down the track. That sounds a bit cynical, but there you are. It can be a means of tethering a child closely to you, which might make you feel good but is unlikely to do much for your child.

If you are determined to help your child buy a property, here are some suggestions. Encourage your child to take responsibility for their financial situation by saving the deposit. This might seem like a huge amount of money in today's property market but at no time in the past 100 years has it been easy for an average Australian to buy a home, and in fact it is no more difficult today. There are several ways you can encourage your child to save a solid deposit. Perhaps they can live with you rent-free. If you take this option, make sure they realise you are in effect helping them buy their home by providing them with free accommodation. It should be appreciated and they should help you around the house.

Another option is to match their savings dollar for dollar, but only if you believe you can afford to do so.

You should avoid going guarantor on the loan at all costs. Going guarantor basically makes you liable for the debt and, depending on the terms of the guarantee, you might have little control over the situation or how you can resolve it to your best advantage. If you must go down this route, there are now clever mortgage products on the market where you can be a co-tenant or a part-owner in a property.

This gives you much more control over what happens if your child finds they can no longer afford the payments. Another strategy is to place a second mortgage on the property.

Whatever you decide, make sure you first talk to a caring lawyer who can suggest ways to protect your interests if things go wrong. Above all else, make sure your actions are transparent. What you do for one child you must do for them all, unless you have a good reason for favouring one over the others, such as caring for a severely disabled child.

If you do decide to give a child a large sum of money and you are not prepared to involve a lawyer to put in place the necessary paperwork to safeguard your funds, then look upon it as a gift. Even if you and your child might see it as a loan, without formal documentation to confirm it's a loan it is a gift - and trying to treat it as anything else will only cause family arguments. It's just not worth it.

Do it without stressing

We've seen when and how not to help your children with education and house costs. Now let's look at ways of helping them without ruining your budget or causing family tensions.

So your child has sent their kids to private secondary schools and there is pressure on you as a grandparent to pay the fees for their final couple of school years because your child, for whatever reason, can no longer afford to pay. It can be difficult to say no, but it's best to speak to a solicitor before making any decisions. Certainly you would want to step in to ensure your grandchildren don't go through the upheaval of changing schools, and that's okay if you can afford it.

But don't be tempted to be kind if the grandchildren are in primary school without involving a lawyer in your decision as it's a very long-term financial commitment.

If you do provide financial support for their education, ensure you always have visiting rights to the grandchildren. Take steps from the very beginning to ensure that if you do make a financial contribution, you expect to always be able to see that child. There is nothing more hurtful for a grandparent who has paid for an expensive private education to later find they are cut out of the picture and can't attend school ceremonies, for example. And trust me, this happens.

Ensure all your children know which grandchildren are receiving your financial support and equalise this gift by adjusting your estate planning wishes accordingly. Don't think you will be able to keep something like this a secret. Your other children will eventually find out and could be quite hurt if you haven't already explained the situation to them.

There are also better ways to help your children buy a property than just handing over cash. If you have a child who is married with children and, due to sickness or unemployment, is facing hard times, it can be tempting to step in and repay the mortgage for them, but this can lead to a litany of difficulties. It doesn't address the underlying problem, nor does it encourage your child to get back on their feet by their own means and in their own time.

Most damning is that it encourages children to think they can't cope with life's problems and continue to rely on you for help.

A better solution is to contribute to the mortgage repayments, either entirely or partly, for a period of time to take the direct financial pressure off them. This solution means you are in the driving seat and you can stop making contributions at any time. Most importantly, you haven't just lost a big chunk of your savings and so undermined your own ability to generate income in future years. Nor will you ever face the difficulty of trying to get this money back.

And remember, as a grandparent and parent your primary role is to be there for moral support and to help where you can. Avoid providing financial support just because you have access to your superannuation savings or you could open a Pandora's box.

What to do for grandkids

While it is tempting to give money to adult children, it seems it is even more tempting to give money to grandchildren. If you want to live a long and happy retirement where you can pay your own bills and enjoy life without worrying too much about where the money is coming from, then don't give money to your grandchildren.

There is usually room in any budget to find $100 for a birthday gift or Christmas present. That's fine.

Some grandparents decide for reasons of their own that they want to set up accounts with money or shares or some other investment in their grandchild's name. This is nearly always a mistake. It's difficult to invest any reasonable amount of money in a child's name and not have those earnings hit by high income taxes, and there are few children who appreciate paying higher taxes than they otherwise need to.

Children usually find this out when they get a job at a local supermarket and do their first tax return at age 15 or 16. While the other kids they work alongside all year will get a handy tax refund on their earnings, these grandchildren find they don't because granddad bought shares in their name 10 years ago and didn't tell them. So they are hit with higher taxes even though they have never seen the shares or the dividends. It can be a difficult situation and makes little financial sense.

There is room for moderation. There is always a good argument for a grandparent to help financially if for some reason their grandchild is missing out in an irreversible way due to a shortage of funds.

One example is that of a grandchild who is doing well at a private school and whose parents can no longer afford to pay the fees, as I mentioned earlier.

The same goes if a child is particularly gifted or sporty and needs extra training or where a grandchild is sick and needs extra care. Few grandparents would hesitate to help financially in these situations.

Under any other circumstances, my advice is to keep your retirement savings intact. Don't spread money around because you think it will make you look like a wonderful grandparent or because you think your family will be extra appreciative. In my experience retirees rarely benefit by giving money away to family members. So, it's best to keep it in your pocket unless it is really needed.

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