Many Parents Draining Savings to Help Children

The Bank of Mom and Dad is playing a major role in the U.S. housing market, according to Legal & General Group, putting some parents' retirements at risk.

In 2018, more than a million parents and grandparents in the U.S. gave $41 billion to the younger generation to help them buy a first home, according to Legal & General Group.

Fifty-four percent of this money came out of their cash savings for retirement. Seven percent of givers delayed their retirement, 15% reported a lower standard of living, and 14% felt less financially secure. Furthermore, 48% made these gifts or loans without getting professional advice. Of those who have delayed retirement, it has been by three or more years.

Twenty-nine percent of parents and grandparents have provided some type of financial assistance to children and grandchildren purchasing property.

“The Bank of Mom and Dad is playing a major role in the U.S. housing market, but the generosity and support many people choose to provide family members is compromising their own quality of life,” says Nigel Wilson, chief executive officer of Legal & General Group. “This generation is helping kids and grandkids purchase property throughout the country, but it would appear that many don’t really have sufficient wealth to do so without impacting their own retirement plans. It’s disturbing to see that some moms and dads have even had to postpone retirement in order to help.”

Eight percent of parents and grandparents have raided their 401(k) to help their children and grandchildren, and another 8% have dipped into their individual retirement account (IRA). Seven percent refinanced their homes, 6% downsized to a smaller property, and 5% came out of retirement.

Thirty-seven percent of the parents gave the money outright, not asking for it to be repaid. Thirty-three percent provided the money as a loan but with no interest. Fifty-one percent of parents and grandparents think it is harder for younger generations to buy a home than it was for them, citing high property prices (71%) and incomes not increasing (63%).

Those unwilling or unable to help said they don’t make enough to help (25%), think family members should be self-reliant (20%) and do not have savings (13%).

Some advisers say that it is important to discuss the pros and cons of giving children or grandchildren money, particularly if the amount is more than $100,000 and they do not ask for the money to be returned. In most cases, parents who lend or give their children money worry about their ability to retire.

Younger Generations’ Handle on Money

While parents and grandparents may think that younger generations have it harder when it comes to being financially sound, a recent Sallie Mae study found that young adults are confident and optimistic about their money management skills.

Seventy-one percent of college graduates consider themselves excellent or good at dealing with money, followed by 59% of college students and 42% of those who never finished college. Eighty-two percent of college grads know their credit scores, compared to 56% of students and 67% of those who never finished college.

Forty-one percent of college grads have an emergency fund. This is true for 22% of students and 31% of non-completers. Twenty-four percent of college grads say they put their savings into high-interest accounts, compared to 17% of students and 10% of those who never finished college.

Every group wants to improve their financial literacy, with this being the case for 71% of college grads, 84% of students and 69% of non-completers. This is evidently very much needed, as when the three groups were given a four-question test on financial basics, only 24% of grads got all four right, 11% of students and 18% of non-completers.

Eighty-three percent of college grads have credit cards, whereas this is only the case for 57% of students and 61% of non-completers. Students have, on average, five cards, up from three cards in 2016. Their average balance is $1,183, up 31% from 2016.

Asked why they have a credit card, the No. 1 reason was to build credit, true for 74% of grads, 58% of students and 77% of those who never finished college.