Some of the toughest financial situations occur when relatives ask for money.It’s common for elderly parents to run out of funds and now that we’re living longer, it’s equally common for our adult children to ask for support. The question is how to respond.
In my family, we have experienced relatives’ requests for money a number of times, both from elderly parents as well as from our adult children who long ago left home. Clearly, we are hardly alone these days. It’s a very common problem for retired people in the sandwich generation, living in between elderly parents and adult children.
Let me first say, that the best approach is to try and help parents and children to understand how best to handle money before they have a problem.That has two benefits: They are a lot less likely to need additional funds and they realize the importance of self-reliance.
Both generations have to learn to calculate how much they can afford to spend from the income they have and then learn to budget that amount.
That budget has to include some money that goes to savings for their future support, to cover inflation and to provide an emergency fund for unknown and unpredictable expenses.
Often the initial requests are for a “loan.” In reality, though, loans to relatives are seldom repaid even if you get a formal contract and use a bank for deposit of their payments.In the case of elderly parents, it is very unlikely that they will ever be able to accumulate enough savings to return the principal. Most of the time, they won’t even pay the interest. In the case of our own parents, we established trusts for them which were helpful because they got the trust earnings and theoretically we would get to keep the principal. But we had to provide more money as time went on.
So in most situations, it’s best just to give them the money — if you can afford it.Whether you can afford to give the money away or “loan” it involves a risky calculation — or blind faith that you will somehow be able to live for many years without this loss of savings. Each person can give about $14,000 each year as a gift to someone without any tax consequence; so gift taxes seldom need consideration.
I make a retirement projection each year to determine how much I can afford to spend in the coming year. I try to make that calculation conservative in several ways: I make discrete inputs for large future purchases that are likely; those include things such as the replacement of our roof, new appliances, house repainting, carpeting and automobiles. I also put aside 10 percent of our current investments as an emergency fund.(MORE: How to Find Financial Advice You Can Trust)
Then I make a plan for how much I can spend from the remaining investments based on long-life expectancies and conservative values for investment returns, inflation and taxes. I make small reductions in expected Social Security and pension payments.
I have no assurance that this will represent the worst that can happen, but am hopeful that if it isn’t, we can cope with a significant reduction in our livelihood.
Mature relatives don’t come with requests for money for minor situations. Almost always they involve tragedies. Not getting the money could mean getting a reverse mortgage or going on government welfare or depending on charitable contributions.In some cases, this is also true for adult children. However, adult children who are in reasonable health can recover, even if they have to go through bankruptcy. Although bankruptcy isn’t pretty, most of the time people are still left with the money that was in their employer’s savings plan and home. Being free of their debts, they can get a fresh start. If student loans are involved, bankruptcy or restructuring the loan may not be possible — so there can be a lifelong problem as interest and late fees build.
So the decision whether to support, say “no,” or compromise can be really a tough one. To make your choice, it helps to do several things. One is to try and write down the consequences that might come from the alternatives, both to the requesting family member as well as your own future retirement. Then discuss the alternatives with your spouse.From experiences I’ve witnessed, saying “no” to a younger adult child may well be the best thing to do to cure spendthrift behavior or a reckless life style.
Finally, it can be a great help to get an experienced professional’s advice. This could be from a certified financial planner or someone at a local government office which might provide help in the form of unemployment compensation benefits, SSI (Supplemental Security Income) benefits, health care (through Medicaid), food stamps, cash (Tempory Assistance for Needy Families or TANF), housing assistance, child care, free transportation, etc.Google “Welfare help” to find out what is available in your state. Such advice may offer a different perspective, a better solution or a better response to the relative asking for money.
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