Know your redline
Your children started out life in a position of need… they were entirely dependent on you for their survival. As parents, we are hard-wired to love, nurture, comfort and protect them.
When our children transition to young adults, this 'wiring' isn't automatically removed or replaced with feelings of cold indifference. We continue to care, worry and carry the weight of an uncertain future for them. This weight is piled onto the uncertainty that we face in our own life journey; including our retirement plans and financial health.
In my role as a family wealth advisor, I see this protective sentiment play out in the financial decisions of parents who are naturally conflicted between their own financial needs, and those of their children. While there is no formula-based method to determine how much financial support is appropriate, it is generally true that those decisions can't be made without first knowing the parent's situation and financial wellbeing.
As the flight attendants are quick to remind you, when the oxygen masks fall, place it over your own mouth first. Adult children stand to gain the most from parents who have a solid foundation themselves.
The redline
If your 'life tenure' has afforded you the pleasure of driving a car with a manual transmission, you will know the concept of 'redline'. Car manufacturers define the redline as the upper limit of engine speed (RPMs). Below this redline is the safe operating range for the engine where you are unlikely to stress it to the point of failure. Exceeding this redline means that you are effectively pushing your luck…consistently venturing past the redline will eventually lead to catastrophic failure.
The same can be said for parents who consistently exceed their financial redline. Providing support in excess of your financial capacity to do so, is unquestionably a noble and loving gesture; but it puts you and your children at risk.
For many families this financial 'redline' is simply not known. In the absence of a comprehensive financial plan, one of two outcomes will result:
Support provided beyond the redline will lead to negative financial consequences (delayed retirement, scaled back lifestyle, or prematurely exhausting retirement funds)
Support provided well within the redline limits; but not knowing this limit will lead to underliving retirement potential ("I'm not sure I'll have enough")
In either case, not knowing the redline leads to a negative outcome.
Fortunately, for the vast majority of families I work with, family wealth is an important resource that can be leveraged by younger generations (both children and grandchildren). Having self awareness and a well constructed plan allows for an intentional support strategy that can benefit both parents and their children.
The 'intentional' part of this support strategy goes beyond the dollars and cents, and incorporates the unique circumstances of each potential beneficiary, and the philosophy of the parents.
Hand out vs. hand up
When advising clients, we often ask whether their intent is to provide a 'hand out' or a 'hand up'. The difference is subtle but important. For example, when it comes to post secondary education, a 'hand out' approach would be to pay for that education without any expectations for repayment or contributions by the child. For the child, this means that there are no financial worries or anxieties related to graduating with a pile of debt, and this allows the student to focus on their education without the distractions of part time work and summer jobs - in theory.
A 'hand up' approach reflects more of a supportive 'we're here to help' philosophy; meaning that the parents won't let financial constraints get in the way of pursuing educational or vocational goals, but there is an expectation that the student contributes to their own cause. The range of support varies depending on the financial capacity of the parents, and this invariably requires an understanding of the 'redline'.
With a clear understanding of the redline, excess financial resources become a valuable tool to further the financial objectives of adult children. Whether that support comes in the form of gifts or loans largely depends on the philosophy of hand out vs. hand up.
I do find irony in situations where parents provide unconstrained financial support for education, in that the opportunity to teach financial accountability is lost…financial knowledge and resiliency is a life skill that is arguably just as important as the academic learnings of the program.
Beyond education goals, providing support for vehicle purchases or first home purchases can be an extremely beneficial use of surplus resources. If structured as a loan, the 'bank of mom and dad' can provide more favorable terms and greater flexibility than those of a bank. In addition, the loan can serve as a diversification strategy for a retirement portfolio providing an income stream to the parents. This flexible loan structure can remain in place until such time as the income and/or capital is no longer needed; moreover, the loan could possibly be forgiven at some point provided there is no risk to the parents' financial plan.
Fair not equal
Another worry for many parents beyond their own financial capacity is the desire to treat all of their children 'equally'. While this is a noble objective, it is frequently impractical as a planning principle. We will dive deeper into the concept of 'fair not equal' in a future blog post. As the concept pertains to today’s discussion, fairness can also be incorporated into financial support for children while you're still alive. This is important since you may be required to explain your rationale!
As long as there is consistency in philosophy applied to each child (i.e. hand out vs. hand up), then absolute equality becomes less important. Each child's life journey will be different, and their financial needs at different times of their lives can vary widely. If you are transparent and open with your intentions and philosophy, then there is less need to 'count the nickels' in every gesture of financial support. Over the grand arc of life, these ledgers and accounts find a way of achieving balance and fairness.
Being in a position to provide support to your adult children reflects discipline as well as good financial decisions and stewardship on your part. Working with a trusted advisor (CFP) to identify your financial redline allows you to 'know for sure', and put your resources to their best possible use - enriching both your lives, and the lives of those you love.
Cheers,
