Tanysia Komers is trying to not be a hypocrite.
The certified financial planner with Investors Group moved to Calgary less than two years ago, and she already has one of the fastest-growing practices in the region. Ambitious and driven, she nonetheless credits the pace of her success in large part to the financial support she received from her parents early in her career.
“My parents supported me through school and through the early stages of launching my business,” says Komers. “Graduating without student loans gave me an immediate and tremendous leg up. What it meant was that I could start focusing on investing in my career right away.”
Knowing her parents had her back also meant that Komers could pursue the riskier track of building an independent business and financial practice instead of having to take a “safe” job with a predictable paycheque that would pay the bills – and pay off those student loans. But when she sits across the table from clients who want to make a major financial gift to their children, the first question Komers asks them is, “Does it make financial sense?”
It’s a question too many generous baby boomers don’t ask themselves, or their financial advisors, before jumping in to assist their adult children. And the consequences can be catastrophic. Consider this scenario: you’re five years away from retirement, and your son comes to you and asks you to help him buy a business. You feel you’re in a good position financially – you and your spouse are both working at well-paying jobs, your house is paid off, and you have what you think is a comfortable nest egg in RRSPs and other savings. You love your child and you want to help him be successful. Job-wise, he hasn’t really “found himself” – never been happy, never found the right fit. Maybe this, finally, is it. How can you possibly deny him?
So you help him buy the business. It’s more expensive than you initially thought, and you don’t want to dip into your RRSPs, so you take out a new mortgage on your house. And the business doesn’t really take off right away. And there’s this bill to pay and this creditor to settle up with, and so on. The business is never in the black, and then the inevitable happens, and it goes belly up. And the year you were going to retire, you find yourself with a massive mortgage on your once-clear house, and, because you co-signed this and that, responsible for debts your son incurred.
Unfortunately, that is not a hypothetical scenario. It’s one that left Tina Tehranchian, a senior financial planner and CFP professional with Assante Capital Management, Ltd., devastated as she watched her clients lose virtually all of their savings and put themselves in a position of near-bankruptcy when they should have been beginning to enjoy their retirement. “It was awful,” Tehranchian says. “I kept on telling them it was a bad idea, but they felt compelled to help their son.”
Scared? Good. Tehranchian, Komers and every financial planner alive wants you to be. Not so scared that you go Ebenezer Scrooge on your children and make them suffer through the school of hard knocks while you drink martinis on the deck of your retirement yacht. Just scared enough to think hard before you give – both about how the gift will affect your children and your own financial future.
Because you will give. “Every parent wants the best for their children,” says Alana Riley, district vice-president of Calgary South with Scotiabank. “And they will give, with the best of intentions, whether it’s to help them start a new business, get them into their first house, or help them with a major purchase like a car.”
In most ways, the Bank of Mom and Dad is nothing new. Parents have always provided some financial support to their adult children, particularly around “big ticket” purchases like houses. Parents and family members have long been dominant “angel investors” for most start-up businesses by young people. And government student-loan programs specifically expect parents to contribute financially to their children’s post-secondary education. What’s new is the extent to which parents are expected to provide this support. Studies by the major banks, for example, report that more than half of house-hunting millennials expect their parents or family members to provide some or all of the money necessary for their first home purchase.
According to Dion Linke, senior vice-president of Retail Banking at Servus, there are five related variables that contribute to the reliance of adult children, millennials in particular, on the Bank of Mom and Dad. The first is lower interest rates, which simultaneously encourage borrowing, discourage saving and reduce the “opportunity cost” of giving for the parents. “If the parents’ savings are getting them a return of one per cent, there is much less of an opportunity cost to giving those savings to their children toward a house purchase or business investment than if those savings were making six or eight per cent, as they might have in the past,” Linke explains.
Second, government financial programs, such as RRSPs and RESPs, which Canadians have been taking advantage of enthusiastically, have given fiscally responsible boomers both a habit of saving and a pool of money from which to give to their children.
Third, intermittent downturns notwithstanding, Canada has gone through more than two decades of consistent economic growth. “This has allowed Canadians to accumulate significant wealth,” says Linke, again, deepening that pool of funds from which parents feel they can draw to support their children.
Fourth, the cost of big-ticket items has gone up dramatically. Middle-class baby boomers were able to afford to buy an entry-level house with their entry-level salary. Millennials? Not so much.
Finally, many millennials are the beneficiaries of multi-generational estate planning. “There is a significant wealth transfer underway in Canada right now,” Linke says. “Baby boomers are inheriting money from their parents, and many are choosing to pass some or all of this inheritance directly to their children now, as part of their own estate planning.”
You can certainly see their point. Why make your children wait for their grandparents’ inheritance when odds are you’re going to live to be 90? Better to give it to them now. Get them into a nice house in a nice neighbourhood, give their business a healthy injection of cash, support them financially while they get their second or third degree at the London School of Economics or Oxford, spend a year studying art in Paris…
Makes sense. Except sometimes, it doesn’t. “The scary thing is how few people have a really accurate view of what their financial situation is and what their retirement needs really are,” says Komers. “They have a sense that they are doing very well. They have a good and growing income. They have some savings. And they are sure they can afford to give their kids this major gift. But you don’t know what’s really going on behind the scenes until you drill down and start asking some hard questions, and doing some long-term planning and projections.”
Long-term, in the era of 80-plus life expectancy, really means long term. Which, among other things, means periodic review and reassessment. Riley suggests sitting down with your financial planner once every six months. “Treat your financial health as you would your physical health, and see your financial planner as often as you would see your doctor or dentist for a check-up,” she says.
Tehranchian agrees. Regular reviews, particularly for gifting parents, help predict coming shortfalls and, hopefully, provide time to address them. She recently did a review with a long-term client, with whom she had set up a healthy retirement plan about 20 years ago. “When we did her update, all of a sudden, I saw shortages,” Tehranchian says. The client had been assisting her adult daughter, and then her grandchildren as well, without factoring those costs into her overall financial and retirement plan.
As she’s helping her client reposition her finances, Tehranchian is also asking her to consider the consequences of financially supporting one child to the detriment of another. “In most families, not all children need or ask for help equally,” she says. “So what is the effect of giving a lot to one child on family dynamics, and also on the future financial health of the other sibling?” If you’re depleting your retirement savings to help out a struggling daughter, does that mean that in a decade or two, the son you haven’t helped at all will have to deplete his savings to support you?
Like Komers, Tehranchian got a financial boost early in her career from her parents, and she plans to do the same for her own child. “I think it’s important to help children, especially in today’s market, with something like buying a home,” she says. “But it’s also important to do it in a way that doesn’t endanger your own financial health and in a way that helps them learn financial responsibility.”
So, if you give – and you will give – give wisely. “Get yourself on a stable table first, and know the consequen-ces of the gift,” counsels Komers. “I’ve had clients say, ‘You know, I don’t mind retiring two or three years later if that gives my kids a head start.’ And that’s great, if you’re aware of the consequences of the gift, and you’re willing to accept them.”
It’s even better if your children are aware of the consequences of the gift. Riley suggests that you include your adult children in the discussions with your financial planner on how buying them a house (or a car or a business or another degree) affects your overall financial health. “Actually, don’t wait until they’re adults,” she says. “Get your younger children financially literate. Bring them with you to your bank, get them in the habit of saving, and show them how you’re saving for them.”
Don’t give more than your children can afford to support. “Suppose you give your children a lump-sum gift that allows them to purchase a house in a really nice neighbourhood. Does that put them into a lifestyle that’s out of reach at their current income? Will they be able to sustain the payments over the long-term?” asks Linke. You’ve paid for the property. If it turns out your children can’t afford to maintain it, are you willing to subsidize utilities, repairs, taxes and condo fees?
It’s also important that parents give tax-effectively. “When gifting a down payment, flow the money through the adult child’s RRSP under the Homebuyers’ Plan. Not only does that increase your after-tax dollars, but it has that payback factor,” says Laurie Rutherford, district sales leader, Retail Banking at First Calgary. “Your children have 15 years to pay it back – to themselves – so there’s a responsibility component to it that’s not too onerous.”
Don’t trust RRSPs? There are other options, especially if you have time on your side. “There are so many other products and structures you can use,” says Komers. “If you know you’re going to be supporting your children with big purchases, start planning for it now. Investigate trusts, bonds and insurance products.”
In particular, when it comes to angel investing in your child’s business, make sure the kid has “skin in the game,” says Tehranchian. Consider structuring the gift as a low-interest loan, or as an actual investment that they will repay to you when their venture is a success. That will make them feel more responsibility, and also more ownership over their ultimate success. Both these factors may contribute to their eventual financial self-sufficiency.
Keep in mind that if you overextend yourself in generosity to your children now, you may be putting them in a position where they will have to support you in your golden years, because you’ll have tapped out your retirement fund supporting them. Will they be able to afford that? Or have you fostered such a reliance on the Bank of Mom and Dad in them that they’ve never learned the real cost of living?
“As a parent you absolutely want to help, but you also have to teach your kids financial responsibility,” says Tehranchian. “You need to teach them to take responsibility, as adults, for their own financial future. Because the Bank of Mom and Dad is going to close one day, permanently.”