Whether or not you choose to support your adult children financially is a personal decision that depends on several factors.
We all love our children and want to give them the best possible start in life. But what happens when supporting your adult children starts to impact your retirement plans? It’s an important question to ask yourself, and a good place to start is to understand what type of financial support you’d be providing.
Types of financial support
Financial support for your adult kids can take many forms, each with their own set of considerations:
Education
Education is expensive, and costs are only increasing. Education costs can include tuition, books, student loans, residence fees (accommodation), and other living expenses. Paying for your kid’s education costs could impact your own financial health and retirement plan, especially if you have multiple kids going to school.
If you’ve been contributing to a Registered Education Savings Plan (RESP) for your kids, it can have several impacts on your ability to financially support your adult kids and your retirement:
- Retirement savings: If you’ve been contributing a significant portion of your income to a RESP, it might have reduced the amount you were able to save for retirement. A greater reliance on your Canada Pension Plan (CPP) could be the result here.
- Tax implications: RESP withdrawals are taxed based on your child’s income, which may not be much if they’re working part-time or perhaps not at all. This can help stretch the education savings further and potentially reduce the need for additional financial support from you. On the flip side, if your kids don’t attend post-secondary and you withdraw the funds, you’ll have to pay taxes on the money the RESP has earned, which could be a significant chunk of money that could impact your retirement savings plans.
Housing
Assisting with housing costs, whether it be contributing to rent, mortgage payments, or helping with a down payment on a home, is another common form of support. While this can help your kid secure stable housing, it’s important to consider how this will impact your short-term and long-term goals.
Do you have a mortgage to pay as well? If you’ve co-signed on your kid’s mortgage loan, are you prepared for the impacts of that if something unexpected happens?
Debt
Many young adults carrying significant debt, from student loans to credit cards. This is especially the case these days with the current state of inflation. There’s good debt and bad debt.
Good debt is typically associated with investments that will grow in value over time, such as a mortgage or student loan. This type of debt can help you build long-term wealth. Bad debt, on the other hand, is typically associated with purchases that depreciate, such as a car loan.
By helping your kid’s pay off their bad debts, you could be setting yourself back with your own financial obligations like car loan payments or credit card payments. These debts require payment deadlines to be met and you don’t want to put yourself behind.
Living expenses
In some cases, you may find yourself paying for your kid’s living expenses. This can be things like groceries, utilities, or internet and cable bills. This can add up quickly especially if your kid isn’t working and doesn’t receive government benefits like employment insurance. Opens a new website in a new window
If you’re paying for your kid’s basic needs, how will your own needs be impacted? Will you have enough money for your own groceries and bills each month?
You’ll need to think about creating a budget to make sure you can allocate enough money to your own expenses, consider increasing your income by working more hours and exploring passive income opportunities, or reducing your expenses by things like downsizing your home, cutting back on non-essential spending, or finding cheaper alternatives for necessary expenses.
What’s the impact on retirement planning?
You should also be thinking about your retirement plans and how they can be impacted by financially supporting your adult kids.
Reduced retirement savings
When you support your adult kids financially, you’re taking a portion of your income and savings and passing it on them. While this is a wonderful thing to do, it could mean that you’ll have less money for yourself.
Now, think about your retirement accounts, like your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP). These are your personal accounts to help you save for your future. You contribute into these accounts, and over time, through compound interest, they may grow into a nice nest egg for your retirement that you can withdraw from.
If you’ve given a portion of the money you’ve been planning to save, you may not have as much retirement savings, which could impact the kind of lifestyle you can afford in your golden years.
Delayed retirement age
Prolonged financial support for your kids can delay your retirement age because the money you spend on supporting them is money that could have otherwise been saved or invested. This means you might need to work longer to accumulate the necessary funds for retirement.
Let’s look at an example. John is 60 years old and has been planning to retire at 65. He has 2 adult children, aged 25 and 27, who are still financially dependent on him. John spends an average of $1,000 per month supporting each child, which totals to $24,000 per year.
John’s retirement plan was based on his savings and investments, which he expected to grow at a rate of 5% per year. However, because he’s supporting his adult children, he’s unable to contribute as much to his retirement savings as he had planned.
If John continues to support his children at the current rate for the next 5 years, he’ll have spent $120,000 that could have been added to his retirement savings. At a 5% annual growth rate, this amount could have grown to approximately $155,000 by the time he reached 65.
John realizes that he will not have enough savings to maintain his desired lifestyle in retirement. He decides to delay his retirement by 3 years to make up for the shortfall. This decision not only impacts John’s financial freedom but also his plans for his golden years, including travel, hobbies, and time spent with family and friends.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
Extended support into retirement
Constantly supporting your adult kids financially might mean your money has to stretch thinner than you hoped. Retirement is supposed to be about savouring life, not stressing about it. If a big chunk of your funds goes towards helping your kids, it could translate into fewer vacations, going out for nice dinners, or fewer spontaneous fun moments.
You could also experience a lack of funds for your own essential needs in retirement like medical costs or long-term care costs. These are situations that could affect your mental well-being in retirement.
Family dynamics
Are you one of the many Canadians who are supporting your parents and supporting your adult kids? This is known as living in the “Sandwich generation”, and if so, you’re probably facing a delicate balance of caring for your kids and parents while also trying to take care of your own financial future.
Are you a part of a blended family? Your vision for retirement may change based on the needs and goals of your blended family:
- Merging existing savings: If you’re remarrying or entering a new partnership, you may already have savings set aside for retirement. You’ll need to decide whether to merge these savings, keep them separate, or start a new account for joint savings.
- Increased financial obligations: If you have children from previous relationships, stepchildren, or in-laws that need financial support, this could impact how much you’re able to save for retirement.
Every family situation is unique, so it’s important to think about things like this before deciding to financially support your adult kids.
Reliance on government benefits
It’s important to understand how prolonged financial support for your adult kids can potentially impact your reliance on government benefits. When you’re constantly supporting your kids financially, it might mean you’re dipping into your own savings more than you planned. This could mean you become more reliant on benefits such as:
- Canada Pension Plan (CPP): The CPP is a pension plan funded equally by employees and employers. All working Canadians over the age of 18 contribute a percentage of their earnings to the CPP. Accessing the CPP early could boost your monthly income, which could be helpful to cover the costs of supporting adult kids, however this also means you receive less per month over time. If long-term financial support has meant you’ve saved less into a personal or workplace pension, you may be particularly reliant on this CPP payment in retirement.
- Old Age Security (OAS): The OAS is funded from general tax revenues. It provides monthly benefits to eligible Canadian seniors to help cover living expenses in retirement. If you’re spending a significant portion of your income on supporting your adult children, you might become more reliant on OAS to cover your living expenses during retirement.
- Guaranteed Income Supplement (GIS): The GIS is a monthly payment available to low-income Old Age Security pensioners. If you’re supporting your adult children financially and spending a portion of this money, you’ll have less money left over for yourself and your needs.
Remember, it’s all about balance. While it’s natural to want to help your kids, it’s important to ensure your own financial security during retirement.
How to balance financial support with retirement plans
Create boundaries
It’s crucial to establish clear financial boundaries when supporting adult children. This could involve setting a limit on the amount of money you’re willing to provide, specifying the purposes for which you’re comfortable offering financial support, or establishing expectations for contributing to household expenses if they live with you.
Encouraging financial independence
You can help your adult children work towards financial independence by building their money management skills, sharing household expenses and chores, and switching your role from provider to coach. This can involve having open discussions about finances, helping them understand the importance of budgeting, saving, and investing, and encouraging them to take on more financial responsibilities.
Seeking professional help for retirement planning
You could seek professional help to prepare for your retirement. An advisor can provide valuable insights and strategies to optimize your retirement plan. They can help you navigate the complexities of retirement accounts, investments, and tax implications.
Focus on retirement contributions
Despite the financial responsibility of supporting adult children, it’s important to continue contributing to your retirement savings, even as a lump-sum. This includes contributions to government pensions, employer pensions like the Deferred Profit-Sharing Plan (DPSP) if you’re still working, Locked in Retirement Accounts (LIRA), Registered Retirement Savings Plans (RRSPs), and Tax-Free Savings Accounts (TFSAs).
Look for alternative income
You could look for alternative income streams to supplement your retirement savings. This could include rental properties, dividend-paying stocks, part-time work, or even starting a small business. These alternative income streams can provide a steady source of income during your retirement and supplement your existing savings.
While it’s a great thing to financially support your adult kids, it’s not a decision that should be taken lightly. It’s crucial to make sure that you’re safeguarding your own financial stability and retirement plans or else how can you support anyone else?