Plan Ahead for Generational Generosity

When you retire, can you afford to help your loved ones?

This issue is certainly on the minds of many retirees. Consider this: Seven in 10 retirees say they are willing to offer financial support to their families, even if it could jeopardize their own financial future, according to the Edward Jones/Age Wave Four Pillars of the New Retirement study. However, the same study found that 72% of retirees also say one of their biggest fears is “becoming a burden on their families.”

How can you reconcile wanting to be generous to your children and grandchildren with the fear of becoming a drain on these same family members?

You’ll have to plan carefully. Ask yourself some key questions, including these:

• How much will I need in retirement? When you retire, some of your expenses, such as those associated with your career, will go down. And you might also downsize your living arrangements, resulting in lower costs. Other expenses, though, will go up. A healthy 65-year-old couple who retired in 2019 will need nearly $390,000 just to pay for health care, according to HealthView Services, which produces health-care cost projection software. Think about all your projected costs and try to create an annual budget for your retirement years.
• What sources of income can I rely on? During your retirement years, you’ll likely have several streams of available income, including Social Security, your 401(k) and IRA, other investments and possibly even some earned income, if you choose to work part time. You’ll want to know about how much money you can count on from these sources each year.
• How much can I afford to give away? Once you know about how much your expenses and income will be during your retirement years, you’ll have a clear idea of how much you can afford to give away to your grown children and grandchildren. Of course, this doesn’t mean you should contribute the entire difference between your expenses and income—you’ll always want to have a cushion. But at least you’ll know what your limits are. On a technical note, you can give up to $15,000 per person, per year, to as many people as you’d like without incurring gift taxes. And you don’t have to give just cash, either—you could contribute to a college funding vehicle, such as a 529 plan.
• How can I protect my financial independence? Other than not spending or giving away more money than you’re taking in, you can certainly take other steps to keep your financial independence and avoid becoming a burden to your family members. For one thing, you can protect yourself from the heavy costs of long-term care, such as an extended nursing home stay. A financial professional can help you choose an appropriate protection strategy. Also, you can guard your interests, and those of your family, by creating a power of attorney, health care directive and other appropriate legal arrangements (with the help of an attorney).

Your best impulses—to be generous to your loved ones while staying financially stable enough to avoid becoming a burden to them—don’t have to be mutually exclusive. With careful planning, you can help make both goals a reality.