Some of the toughest financial situations occur when relatives ask for money.
It's common for elderly parents to run out of funds and now that we're living longer, it's equally common for our adult children to ask for support. The question is how to respond.
In my family, we have experienced relatives' requests for money a number of times, both from elderly parents as well as from our adult children who long ago left home. Clearly, we are hardly alone these days. It's a very common problem for retired people in the sandwich generation, living in between elderly parents and adult children.
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Let me first say, that the best approach is to try and help parents and children to understand how best to handle money before they have a problem.
That has two benefits: They are a lot less likely to need additional funds and they realize the importance of self-reliance.
Both generations have to learn to calculate how much they can afford to spend from the income they have and then learn to budget that amount.
That budget has to include some money that goes to savings for their future support, to cover inflation and to provide an emergency fund for unknown and unpredictable expenses.
Loans in Name Only
Often the initial requests are for a "loan."
In reality, though, loans to relatives are seldom repaid even if you get a formal contract and use a bank for deposit of their payments.
In the case of elderly parents, it is very unlikely that they will ever be able to accumulate enough savings to return the principal. Most of the time, they won't even pay the interest. In the case of our own parents, we established trusts for them which were helpful because they got the trust earnings and theoretically we would get to keep the principal. But we had to provide more money as time went on.
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In the case of adult children, repayment of a loan from a parent is very, very low on most children's priority lists. A loan of less than $1,000 can be interest-free without an IRS problem. For larger loans, you must charge interest at least the rate specified on www.irs.gov
The only thing more likely to cause a problem than lending money to a relative is cosigning a loan with them. If the relative doesn't pay, you are liable.
Considering Gifting Instead
So in most situations, it's best just to give them the money — if
you can afford it.
Whether you can afford to give the money away or "loan" it involves a risky calculation — or blind faith that you will somehow be able to live for many years without this loss of savings. Each person can give about $14,000 each year as a gift to someone without any tax consequence; so gift taxes seldom need consideration.
I make a retirement projection each year to determine how much I can afford to spend in the coming year. I try to make that calculation conservative in several ways: I make discrete inputs for large future purchases that are likely; those include things such as the replacement of our roof, new appliances, house repainting, carpeting and automobiles. I also put aside 10 percent of our current investments
as an emergency fund.
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Then I make a plan for how much I can spend from the remaining investments based on long-life expectancies and conservative values for investment returns, inflation and taxes. I make small reductions in expected Social Security and pension payments.
I have no assurance that this will represent the worst that can happen, but am hopeful that if it isn't, we can cope with a significant reduction in our livelihood.
Once I have determined how much I can spend in the coming year, I am prepared to cope with a relative's request for money. It then becomes a question of how we budget individual things within the overall monthly spending limit.
When the Situation is Serious
Mature relatives don't come with requests for money for minor situations. Almost always they involve tragedies
. Not getting the money could mean getting a reverse mortgage
or going on government welfare or depending on charitable contributions.
In some cases, this is also true for adult children. However, adult children who are in reasonable health can recover, even if they have to go through bankruptcy. Although bankruptcy isn't pretty, most of the time people are still left with the money that was in their employer's savings plan and home. Being free of their debts, they can get a fresh start. If student loans are involved, bankruptcy or restructuring the loan may not be possible — so there can be a lifelong problem as interest and late fees build.
The most emotional problems may come from health issues
. They can be much more severe than loss of a job or bankruptcy. For one thing, they are seldom over within a short period. Moreover, they can result in the person in need not only burdened by uninsured medical costs but being unemployable from a few months to the rest of their lives. Parents are almost always inclined to make big sacrifices for their children in these situations.
If You Can't Help
So the decision whether to support, say "no," or compromise can be really a tough one. To make your choice, it helps to do several things. One is to try and write down the consequences that might come from the alternatives, both to the requesting family member as well as your own future retirement. Then discuss the alternatives with your spouse.
From experiences I've witnessed, saying "no" to a younger adult child may well be the best thing to do to cure spendthrift behavior or a reckless life style.
I've also seen people being unable to provide any significant support to an elderly parent, who must then go on Medicaid, food stamps, live in subsidized housing, buy clothes at Goodwill, etc. This isn't the end of the world. We know several people in this situation, and they live in more favorable conditions than some other low-income families. So it's important to investigate what welfare means locally if that is one of the alternatives.
Finally, it can be a great help to get an experienced professional's advice. This could be from a certified financial planner
or someone at a local government office which might provide help in the form of unemployment compensation benefits, SSI (Supplemental Security Income) benefits, health care (through Medicaid), food stamps, cash (Tempory Assistance for Needy Families or TANF), housing assistance, child care, free transportation, etc.
Google "Welfare help" to find out what is available in your state. Such advice may offer a different perspective, a better solution or a better response to the relative asking for money.
This article appeared originally on MarketWatch.com. Henry (Bud) Hebeler writes for MarketWatch's RetireMentors. He is former president of the Boeing Aerospace Company and vice-president for corporate strategic and operational planning for The Boeing Company. He advises people on retirement planning through articles and programs on Analyze Now.
This article is reprinted with permission from MarketWatch.com. © 2013 Dow, Jones & Co., Inc. All Rights Reserved.