For many parents, building wealth isn’t just about creating a comfortable future for themselves. Helping your kids with a first home, education or another major milestone can be part of the plan, but giving away too much too soon could come at the expense of your own retirement.
Helping your kids without funding their lifestyle
There’s an important difference between giving your children a meaningful head start and continually funding their lifestyle.
For parents in a position to help, helping your kids could mean contributing towards a first-home deposit, wedding, car, tertiary education or even helping them get into business. These can be significant moments where financial support has the potential to give them a genuine leg up.
The distinction comes when that support starts extending to everyday expenses. Regularly covering rent, groceries, credit card debt or other lifestyle costs could make it harder for adult children to become financially self-sufficient.
The goal isn’t necessarily to remove every financial challenge. It’s about finding the balance between providing opportunity and allowing your children to build their own financial independence.
Could helping your kids put your retirement at risk?
The desire to help your children can be emotional, particularly when you’ve spent years building wealth with your family in mind. But helping your kids with money you can’t afford to give away can create a much bigger problem later.
If you give away a significant portion of your wealth and then run out of money during a 25 or 30-year retirement, the financial responsibility could eventually fall back on your children.
One way to think about it is that one of the biggest financial favours you can do for your children is making sure you don’t become a financial liability for them later in life.
That means understanding what your own future looks like before deciding how much you can comfortably give away.
How much can you actually afford to give your children?
There isn’t one number that works for every family.
A financial plan can help map out how much money you’ll need throughout retirement, how long your capital may need to last and what could potentially be left over to help your children.
If your projections show that your capital will already be exhausted later in retirement while maintaining the lifestyle you want, there may simply not be room to give money away without making another change.
There are, however, different levers that can be considered. You could work longer, spend less, downsize your home or change the level of investment risk you’re prepared to take.
Ultimately, it comes back to priorities and trade-offs. If helping your children is important to you, you need to understand what may need to change elsewhere to make that possible.
Give them a head start, but keep some skin in the game
Helping doesn’t have to mean paying for everything.
With a first-home deposit, for example, parents could contribute while still expecting their child to have saved some of their own money. The same principle can apply to a wedding or university costs.
There can also be value in not promising financial support too early. If someone knows their parents will cover the entire cost, it could change how they save, spend or approach the responsibility themselves.
Instead, support can complement the work they’ve already done.
This approach allows parents to provide a meaningful financial boost while their children still have some skin in the game.
There’s more than one way to provide financial support
Helping your children doesn’t always require handing over a large lump sum.
Parents may choose to regularly contribute to a managed fund or index fund, or potentially use equity in their home to help their children into a first property.
The right approach will depend on what you’re trying to achieve, what you can afford and how you want that support to work.
The bigger question is whether the money is helping your children create opportunities for themselves or simply removing the need for them to become financially independent.
Wealth can help your family, but it can also change behaviour
There can be a tension between wanting your children to have an easier life and protecting the characteristics that helped create wealth in the first place.
Parents who have worked hard to build wealth may naturally want to ensure their children don’t experience the same struggles. But those challenges may also have helped develop their independence, motivation and relationship with money.
This becomes particularly important when wealth passes through generations. If children grow up expecting money to always be available, they may have less incentive to create financial independence for themselves.
Setting expectations early can help. Some parents choose to provide significant opportunities such as education while making it clear that their children will ultimately be responsible for building their own financial future.
How parents talk about money and model financial behaviour from a young age can be just as important as how much money they eventually give away.
Key takeaways
- Helping your children financially should start with understanding what you can actually afford to give away.
- There’s a difference between providing a meaningful head start and continually funding an adult child’s lifestyle.
- Giving away too much could leave you short later in retirement and potentially make your finances your children’s responsibility.
- A financial plan can help show what your retirement may look like and whether there is room to provide financial support.
- First-home deposits, weddings, education and business opportunities are some of the ways parents may choose to help.
- Asking children to contribute themselves can ensure they still have some financial responsibility and “skin in the game”.
- Support doesn’t have to mean handing over a lump sum; there are different ways families can structure financial help.
- The aim is to balance giving your children opportunities with protecting both your retirement and their financial independence.
Next steps
If you want clarity around how much you could afford to give your children without compromising your retirement, the Lighthouse Wealth team can help you build a financial plan and understand the trade-offs.
If you’d like to watch more, check out this episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
