When Melanie Lockert graduated with a master’s in performance studies in 2011, she was overwhelmed with student loans. Her many attempts to tap the Bank of Mom and Dad had failed.
She had already worked three jobs to pay off $13,000. After juggling multiple jobs, relocating from New York to Portland, Oregon, and trimming expenses, she paid off the remaining $68,000 in 2015. Now 34, she acknowledges that tackling it herself may have been for the best.
“If my parents had agreed to fund my education, I think it would have kind of been at the expense of their own retirement,” says Lockert, a writer and founder of the Dear Debt blog.
Indeed, plenty of parents may already be behind on that count. Forty-five percent of baby boomers have nothing saved for retirement, according to a 2019 study by the Insured Retirement Institute, a financial services trade group. And with average U.S. life expectancy now at about 78 years old, a nest egg is key.
“Expectations I don’t think are set properly for how long people are going to live, so I think most families are going to need every penny (for retirement),” says Justin Castelli, CEO and financial advisor at RLS Wealth Management in Fishers, Indiana.
If your parents aren’t on track for retirement, accepting a monetary gift from them can create more financial problems than it solves.
What to consider before taking a gift
A gift from your parents could jeopardize their potential retirement earnings, but it could eventually cost you, too, if you’re their financial Plan B for their golden years. Before accepting, take these steps:
• Have a money talk. To preserve quality of life in retirement, financial planners generally recommend saving enough to replace about 70% of pre-retirement income. Castelli suggests that it depends on your parents’ goals. Find out where Mom and Dad stand. If they aren’t sure, a fee-only financial advisor can offer a clearer picture.
• Understand the costs. Parents will be required to file a gift tax return for any amount above $15,000 per parent. And depending on what account the money is coming from and when, additional taxes and penalties may apply.
• Outline expectations. Will you be financially responsible for your parents in their later years? If so, consider those future costs. For example, a 65-year-old couple who retired in 2018 would need to have saved $280,000 to cover health and medical expenses throughout retirement, according to a Fidelity estimate. Mom and Dad may be able to help you out today, but at what cost for tomorrow?
• Weigh the family dynamic. If they give you money, your parents could also feel pressured to help your siblings and further hurt their retirement savings. And if they only help you, it could lead to jealousy or hurt feelings.
• Make sure you truly need the help. As she was paying down debt, Lockert says her work ethic and creativity were pushed to the limit, forcing her to think differently about money. “I felt more confident paying large bills,” she said. If you can budget, save and take advantage of alternative resources, you might tackle financial goals yourself.
Explore other options
Declining a gift from your parents doesn’t mean you’re out of options:
• Make it a loan, not a gift. A family loan could be a win-win: a low interest rate, no credit check and flexible terms for you, and potentially even a profit for your parents. You can consult an attorney or opt for a do-it-yourself promissory note. But it’s not without risks. “Because it’s an official loan, there are the normal avenues of repercussions if the loan is defaulted on,” says Kyle Moore, a certified financial planner and founder of Quarry Hill Advisors in St. Paul, Minnesota. Depending on the terms, parents can call collections, take you to court or seize collateral if you fail to pay it back.
• Research other resources. If homeownership is a goal, for example, the Department of Housing and Urban Development and your state’s housing finance agency feature programs designed for lower-income or first-time home buyers .
• Consolidate or refinance debt. With a good credit score (690 or higher), you can generally qualify for better interest rates to refinance student loans, transfer debt to a balance transfer credit card or consolidate other loans. Regardless of your credit score, a debt management plan from a nonprofit credit counseling agency may also lower interest rates for some debts.