27/04/2017Beware of Financially Supporting Your Adult Children
Whether baby boomers are better off than their millennial children is a popular topic of discussion as of late. From wages that have not adequately risen with inflation, to housing prices having risen drastically in urban areas, many make the argument that millennials find it harder to get ahead.
“Welcome to the Bank of Mom and Dad,” stresses that parents must carefully plan for their own retirement and needs before determining how much is sensible to lend to their children. Millennials do indeed need some help, but within limits.
Why Millennials Need Help
1. Education Is Expensive
School costs have skyrocketed. Tuition alone for an undergraduate degree at the University of Toronto costs between $25,000 and $55,000, for example. More students pursue multiple degrees in order to achieve a higher degree of specialization, and to be more competitive. Often, they return for a second program because they can’t get a job shortly after graduation. Again, the costs of a second degree can be just as high if not more. Completing a law degree in Ontario, for example, costs an extra amount of between $45,000 and $80,000 in tuition alone. Most students cannot work more than part-time while completing full-time degrees, and in some particularly intense programs, find it difficult to work at all. Add up tuition, living expenses, and room and board or rent, and that can amount to a large sum of student debt.
2. Employment Opportunities Are Hard to Come By
After graduating, many students take a significant amount of time to find their first “career” job, and often end up underemployed for at least some time while looking for a job that fits their educational background. Millennials may find themselves wanting to start their own business rather than staying with jobs they don’t believe fully uses their skills and education. Starting a business generally creates more debt before any financial payoff is realized, however.Further, millennials are perceived as having unreasonably high expectations and giving up too easily on things at the outset, because they feel under-challenged. Sometimes they seem to aimlessly bounce from job to job because they have not found their “dream job,” and consequently do not obtain pay raises or senior level roles very quickly.
3. Housing Costs Have Skyrocketed
Many career-advancing job opportunities are located in urban centres like Toronto, and many young people want to begin their careers in large cities. However, housing costs in major Canadian cities have skyrocketed. Without help, and with significant student debt, most young people can only dream of making a down payment on a house – or even affording rent on their own place, without a roommate.
What to Consider Before Giving to Your Millennial Children
You may still be working, own a detached home that is fully paid off, and have a decent amount of savings. However, it can still be dangerous to blindly keep giving to your millennial children.
1. Understand How Much Money You Need to Retire and Support Yourself
Better healthcare and ever-increasing lifespans mean that you need to plan for a very long life. It is easy to underestimate living costs into retirement, as many people do not plan for the worst-case scenario. It is possible to face several expensive health issues, but still live for a long time and potentially need to pay for long-term care.
2. If You Give, Set Some Parameters
Ask yourself whether passing on some amount of “early inheritance” to your millennial children will help them get ahead, or whether there is the risk that your gift will end up going to waste. If you are able to give your child enough money to make a down payment on a home, they can avoid mortgage insurance, and decrease future mortgage payments. Your child may begin to build equity in a home that they could not otherwise afford. Similarly, paying off your children’s student loans so that they can begin to save, rather than merely pay down debt and paying unnecessary interest, may prove useful.
However, loaning your child money for a business venture should be much more discretionary. There is a fine line between giving your child an initial lump sum for some basic business expenses, and co-signing as a guarantor on a large business loan. In the latter scenario, you could find yourself on the hook for an unpredictable amount, and having given your child nothing of value if their business fails in the end. Know where your money is going. Know what your child’s business plan is, and consider whether it is viable.
3. The Risks of Gifting a Down Payment for an Expensive Home
Although helping your child invest in a home seems like a good use of money, consider whether the ongoing costs of owning that particular home fits with your child’s financial situation. Take into account not only the total down payment, but also the overall cost of the home, the mortgage payments that will be required, and ongoing expenses such as property tax or condo fees.
A one-time down payment can help your children afford a home that they have not yet been able to save for and can help them avoid a requirement to buy mortgage insurance. However, if the down payment is on a luxurious home, the mortgage payments may not fit with your child’s budget.
It is imperative to know how much income your child and/or his or her spouse or partner are earning and to have a frank discussion with them about what their monthly expenses are before you commit to a down payment on an expensive home. Even if your child does not end up faced with foreclosure, living “house poor” is very stressful. Or, you may find yourself continuing to lend for mortgage payments, home repairs, or condo fees, in order to help your child stay in the home— expenses you may not have accounted for, and that may dangerously impact into your retirement savings.
Consult With Harris & Partners Inc., Ontario Bankruptcy Trustees
While you may start out in good financial shape, your own situation can become dire if you fail to draw boundaries when lending or giving to your children. Understand your own financial situation and how much help you can budget for. Harris & Partners Inc. can assist if you have growing debt or your children do. Call one of our office locations in Barrie, Brantford, Toronto, and other locations across Ontario at 1-800-268-8093.