Financially Supporting Your Kids Without Compromising Your Retirement

Financial Advisors Perth | Empire Financial Group

Raymond P

MD Empire Financial Group

Raymond is the founder and Managing Director of Empire Financial Group, and a Responsible Manager of our Australian Financial Services Licence, EFG Advice Australia.

This article first appeared in The West Australian, Your Money, on 18 December 2023

Christmas if the time of giving, and at this time of year, it is common for people to consider bigger ticket gifts as an option.

The rising cost of living and real estate is well reported, and there are some segments of the population who are feeling it more than others. It is likely that many retirees, or those approaching it, may be looking at their children struggling with increasing mortgage repayments, or getting on the property ladder at all, and wondering how they can help.

Parents may raise discussions about gifting funds to their children now, rather than having them wait for an inheritance potentially many years down the track.

If you’re considering surprising your children with a financial boost this Christmas, it is important that you weigh up all the considerations before acting on your generous motivations.

The Two Extremes of Retirement Funding

There are strong views when it comes to saving and spending retirement funds. Some retirees will do everything they can to preserve their capital. They want to ensure that they maintain a high retirement fund balance and leave a healthy inheritance to the kids, even if this means living frugally and well below their means.

There is the other school of thought that insists on enjoying and spending all of their money while they’re alive – the theory being that if you’ve planned it well, the last cheque you write should be for your funeral, and if you’ve planned it really well, that cheque should bounce.

The ideal situation probably lies somewhere between those two extremes, and living well while assisting children or grandchildren is something that can be considered with the right planning and forward thinking.

The Right Planning

It is important to work out what your cost of living in retirement will be. That means not relying on arbitrary “how much do I need to retire?” figures, but instead knowing what your specific lifestyle goals are.

Once you know that figure, that needs to be reverse engineered into your total retirement capital available, taking into account your asset allocation, tolerance to risk vs returns, tax structures and factoring in future large expenditure items such as healthcare and aged care funding requirements, and other items such as house repairs or renovations, travel or costs of replacing cars or other big ticket items.

If you can then pressure test that scenario with large gifts included, and it still stacks up, then you may be able to commit to gifting now.  If however the maths put pressure on your future lifestyle and security, it may be prudent to rethink your early generosity.

Considerations Before Gifting

  • Longevity:

There is plenty to consider before you give your children or grandchildren a financial gift. You’re not only giving away retirement savings but also the opportunity of earning a return on those funds. Over 10, 20 or 30 years, that return could be large.
With life expectancy in Australia now almost 84 years on average, we are spending more ears in retirement than ever, so a critical consideration is ensuring a dependable and predicable income stream that will see you through 20 or 30 years of retirement.

  • Centrelink Benefits

If you receive a pension or part-pension, the maximum value of a gift is $10,000 per year or $30,000 over five years, with no more than $10 000 in any one year. If you exceed this amount, the gift will be considered an asset and subject to the asset test and deeming for the next 5 years. Losing the pension can have a significant impact on retirement security with loss of income and benefits.

  • Tax

There may also be tax implications with your gift. Careful consideration needs to be given to how and where the funds are held. Giving funds to an adult can mean they need to pay tax on the returns at their income tax bracket rather than in your potentially concessionally taxed structures like super. If a savings account or shares are purchased for a grandchild who is a minor, a parent may need to declare the income or gains and pay the tax. Capital gains tax may be applied at transfer to you if the gift is in the form of property or shares.

  • Vulnerable Recipients

Think about whether your child or grandchild is mature and financially literate to use their gift wisely. If a person hasn’t been able to manage their money as an adult, giving them a monetary gift could exacerbate their situation. You may also find it hard to see them ‘wasting’ your hard earned money.
Other vulnerabilities include those who are exposed to action by creditors if they are in a delicate business situation, or at risk of their relationship breaking down. It may therefore pay to seek legal advice and instead have funds provided to your children as a loan to protect your well intentioned support.

  • Family Dynamics

Before rushing to assist a child in need of assistance, consider how this impacts on family relationships. If you assist one child, do you need to match that for others when the time comes? If you have several children, and some are better off than others, will you feel compelled to provide for them equally? Family discussions around money can be tricky.  A child feeling they are treated as lesser than another can be hurtful, and you don’t want to cause family tensions over perceived inequality.

A final thought – the best gift?

Most adults want to see their parents enjoy a well-earned retirement without worrying about how they will fund their lifestyle. They want the peace of mind knowing that whatever happens to their parents later in life, they can take care of themselves financially.

Looking after your financial well-being first means you’re taking care of your future physical and mental health, eliminating stress and worry so that you can concentrate on more enjoyable parts of retirement. Only once you have taken care of your future self, should you consider supporting children financially.

Removing that worry from your children may be the best gift you can give to them this Christmas.

Raymond Pecotic is the Managing Director of Empire Financial Group

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