According to a study by Legal & General, one in five US homeowners received gifts or loans from Mom & Dad to help them buy their home. The average amount loaned was $39,000.  

So, what’s the harm in helping your kids, or grandkids, out? None, if it’s a one-time assistance, and if it doesn’t rob the lender of their standard of living or retirement. However, this is often not the case. Approximately 54% of US parents (and grandparents) drained their cash savings to help their kids and grandkids purchase a home. 7% ended up postponing their retirement, 15% reported lowering their standard of living and 14% felt less financially secure. Of those who loaned (gifted) money, 48% made those loans without getting professional advice.

Many good-hearted, well-intentioned family lenders fail to see the financial peril they may be creating for themselves. The financial consequences could be far greater than the amount they are loaning today. For example, a $20,000 loan (gift) today, assuming a 6% return if invested, would be approximately $115,000 in 30 years. That’s significant and could equate to two years in a long-term care facility!

A Merrill Lynch study reported that 79% of parents with adult children between the ages of 18 and 35 provide financial support to their grown kids. The estimated $500 billion parents in this group fork over each year in total is double what Merrill Lynch estimates the same group is setting aside for retirement annually.

So, what can a parent or grandparent do to ensure they aren’t completely derailing their retirement, yet are also able to assist their child or grandchild?

If you’re lending to your child or grandchild, require proof of need. Treat the request as any other lender would. If you find they earn enough to afford their expenses but can’t because of mismanagement, don’t lend money. First, they will likely not be able (or, motivated) to repay. Second, that only enables bad behavior. After all, why should they enjoy the fruits of your frugality while they are mismanaging their own funds?

It’s a fine balance between providing enough to help a child in need, but not providing so much that they lose their desire and motivation to make it on their own.

If you are unable to say “no” to the request, enlist the help of your financial advisor. Your advisor could serve a dual role. First, as “bad cop” to explain what amount is affordable versus what is too risky. Second, if your child’s need is a result of mismanagement, your advisor could provide some guidelines for reigning in their expenses, investing in their own retirement and building financial literacy.