When you become a parent, you essentially make a lifelong commitment to care for the beings you’ve brought into the world.
When your kids are young, that often means sacrificing a social life to attend dance recitals and soccer games. When your kids are in college, it could mean driving luggage across multiple state lines to help your children settle into their dorms. And when your kids grow up, it could mean dropping everything to pick your grandchildren up from day care when their parents get stuck in a late-day meeting.
But the support you provide your children in adulthood may extend well beyond logistical and emotional support. You may also be in the habit of providing financial support. And that’s totally fine — if you can afford it. But you should also know that raiding your retirement savings to support your grown kids is a move you might sorely regret down the line.
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In a recent survey by Savings.com, 46% of respondents said they’d be willing to pull money out of their retirement savings to help support an adult child financially. But that’s a mistake you could end up kicking yourself for.
First of all, 401(k) and IRA funds are restricted so that if you take a withdrawal prior to age 59 1/2, you generally face a 10% penalty on the sum you remove. Furthermore, any dollar you take out of your retirement account is a dollar you won’t have down the line — and then some. In fact, taking even a single retirement plan withdrawal to help a grown child could have very negative consequences.
Let’s say you have your retirement savings in an IRA that’s generating an average annual 8% return, which is a bit below the stock market’s average. You might remove $20,000 from your IRA at age 50 to help your 20-something child pay for graduate school without having to take out loans.
But come retirement, you won’t just be short that $20,000. If you’re retiring at age 67, losing out on 17 years of growth on that $20,000 at a return of 8% per year means having $74,000 less to work with once your career wraps up. That’s a pretty substantial sum of money.
Imagine you’re in your 50s earning $150,000 a year. You have a nice amount of money saved for retirement and you’re maxing out your 401(k) to the tune of $30,500 this year — the highest allowable contribution for workers 50 and older.
If, after funding your retirement account and paying for all of your essential bills, you have $10,000 left over, by all means, give that cash to your grown children if they need the help and it makes you happy to offer up that support. But don’t raid your retirement savings to make life easier on your adult children. If you do, you might make your own life more difficult than it needs to be once retirement arrives.
And while it’s a nice thing to want to put your children’s needs ahead of yours, do keep in mind that if you end up retiring with insufficient income, you might then need to burden your grown kids if you can’t pay your bills on your own. That’s surely not what you want.
So all told, offer up financial support if it won’t negatively impact your nest egg. Otherwise, you may want to limit that support to serving as an on-call babysitter.
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