When boomers should turn the taps off (or on) when it comes to financial assistance for their kids

Jonathan Chevreau | November 16, 2016 1:09 PM ET
For many baby boomers on the cusp of retirement, the issue arises about what kind of financial assistance – if any – they should extend to their millennial (or Gen X) children. You may have heard the term “KIPPERS” used by retirement specialist Doug Dahmer. That acronym stands for Kids in Parents’ Pockets Eroding Retirement Savings.

Now, kids will justifiably protest that they didn’t ask to be born and parents do have a certain amount of obligation financially to “launch” their offspring into an increasingly complex work environment. There’s much to be said for “giving with a warm hand rather than a cold one.”

At least in our own household, we view the family finances as a unit. So when it comes to keeping taxes to a minimum, we endeavour to fully fund our TFSAs. We have only one child, but by helping her fund her TFSA that results in a 50 per cent increase in precious TFSA room for the family as a whole.

We like the suggestion by Winnipeg-based tax guru and author Evelyn Jacks: try to start funding Junior’s TFSA when they turn age 18, and incent them to save by “matching” their contributions. So, if they can save $2,750, the parents would “match” that by adding another $2,750, thereby getting the $5,500 annual TFSA limit.

While there should be limits to parental generosity — luxury cars, world cruises and the latest tech gadgets are things the kids should fund on their own — the notion of maximizing family wealth as a unit also extends to debt. We have always warned our child of the perils of compounding high-interest consumer debt incurred as the result of injudicious use of credit cards. Rule one for us is to pay off the entire balance every month, so not a penny of interest is expended. If that means dipping into a TFSA, then so be it: no stock investment can consistently top the savings that paying down 20-per-cent-interest credit card debt can achieve.

I agree parents should not jeopardize their own retirement just so the kids can live a higher lifestyle than they otherwise could afford. If you believe in your kids having no credit card debt that goes double for parents near retirement, and ideally having a paid-off home mortgage as well. I’d argue that parents shouldn’t even fantasize about retiring if they are themselves still in debt.
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I often write that the foundation of Financial Independence is a paid-for home, so I think that if the parental retirement finances are sound, they can if they wish help the kids scrape up a down payment for a first home. We all know home prices in Vancouver and Toronto are sky high. Those who espouse tough love may prefer to see the kids renting, in hope of a major correction in pricing. That may be a long wait, however, and the beauty of the TFSA is the proceeds can be used to help come up with that hefty down payment without taking a tax hit.

If the kids have friends whose parents think along the lines of this column, here’s a suggestion: Why can’t three millennial friends who know and trust each other not pool their TFSAs to get a down payment on a three-bedroom condo? They each get their own bedrooms and will also enjoy the communal shared spaces like living room and kitchen, and maybe even pools, gyms and party rooms. Instead of individually throwing away money on rent and being subject to annual rent hikes from their landlords, they’ll be building up equity that can ultimately be used to buy their own homes, perhaps with life partners they’ve not yet met.

The other area I believe parents can help financially is in education. Since I believe in never turning down free money from the government, ideally parents begin a Registered Education Savings Plan (RESP) after the birth of each child. Eighteen or so years later, the child should be able to attend higher education without financial pressure, which will make it all the easier to fund their TFSAs at 18, with or without the parental matching program.

As to graduate school, this may be one place parents can draw the line, depending on their own retirement preparedness. It’s true that many undergrad degrees may not be automatic tickets to full-time employment. If it’s clear a specialist degree or certificate can make the difference in the job market, then this is a type of “good debt” I could condone. Help if you can, or suggest Junior borrow and/or work part time.

Is there an age when parental largesse must end? There was a CBC documentary a few years ago on Boomerang kids that used the Italian phrase “big babies” to describe adult children still living at home in their 30s. Some parents may decide a particular age like 25 or 30 is the time to financially throw the little birdies out of the nest but, of course, every case is different.

Financial Post

Jonathan Chevreau is founder of the Financial Independence Hub