Money & Policy

Are Grandparents Being Too Generous?

Financial pros worry that grandparents endanger their own retirement by giving their grandkids too much money

Comedian and author Sam Levenson said, "The reason grandchildren and grandparents get along so well is that they have a common enemy." Certainly there's a lot of affection between them. But today's grandparents may be expressing their love in a less-than-ideal way — by being overly generous to their grandkids.

The grandparents’ financial largesse just might be putting their retirement at risk.
That’s what I heard time and again last week at the What’s Next Boomer Business Summit in Washington.
Not Interested in Inheritances

Two-thirds of grandparents are handing out money to their grandkids these days. “They’re not interested in holding back and saving the gifts for inheritances,” Sandra Timmerman, assistant vice president at MetLife and director of the MetLife Mature Market Institute, said at the conference. “They’d rather give smaller gifts now and see the fruits of their labor being used.” Only 21 percent of boomer grandparents have a will that would leave an inheritance to their grandchildren, according to a MetLife survey.

And in a new AARP survey, 36 percent of grandparents 50 or older said that spoiling their grandchildren was part of a grandparent’s role.
What Grandchildren Expect

Many of the grandparents told AARP that in the current economy, they cut spending on themselves before reducing spending on their grandkids. “Grandchildren often expect to get money from their grandparents,” Timmerman said. “It’s sort of shocking.”

Helping pay for your grandchildren’s college education or private school is, of course, a worthy notion. But many grandparents are giving the kids carte blanche, handing out cash or checks and letting them decide what to do with the money. “We thought more grandparents would put money into college funds for their grandkids, but they don’t,” Timmerman said.
Some financial professionals worry that grandparents’ generosity could backfire, because they might run short of money to pay their own health bills, long-term care costs or everyday expenses. If that happens, they may need to turn to their adult children for handouts.
“One of the biggest gifts a grandparent can give is being able to afford his or her own care,” Chicago financial planner Lazetta Rainey Braxton recently told The Wall Street Journal.

How to Give Wisely

If you’re intent on giving money to your grandchildren, try to do so by specifying the way the money should be used or make the purchase or payment yourself. You could invest in a 529 college fund or just write checks to help cover college tuition bills when they’re due, for example. Or give your grandson or granddaughter money so he or she can buy a computer.

Reuters financial columnist Linda Stern says you might help your teenage or young adult grandchild save for his or her own retirement with a check to be invested in a Roth IRA. You can give each grandchild up to $5,000 a year for a Roth IRA, if he or she has earned that much.
Instead of doling out money to your grandkids, you might give them life lessons. For example: Don’t write a check to reduce your grandchild’s debt load. That may just encourage him or her to keep charging like mad, knowing you’ll be there as a backstop. Rather, talk with your grandkids about how to develop smart budgeting and spending habits that will stave off trouble in the future.
By teaching your grandkids how to avoid missteps with their money and their careers, you might just give them the most valuable gift of all.
Few grandparents do so, however. “We’ve found it’s easier for grandparents to give money than to give advice,” Timmerman said.
RIchard Eisenberg, editor at Next Avenue wearing a suit jacket in front of a teal background.
By Richard Eisenberg
Richard Eisenberg is the Senior Web Editor of the Money & Security and Work & Purpose channels of Next Avenue and Managing Editor for the site. He is the author of How to Avoid a Mid-Life Financial Crisis and has been a personal finance editor at Money, Yahoo, Good Housekeeping, and CBS MoneyWatch. Follow him on Twitter.

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