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Don’t let grown children derail your retirement

Your child can take out a loan for college tuition, but you cannot take out a loan for retirement. Don’t dip into your nest egg to cover their expenses. (unknown/iStock)

We love our children. Most of us would do anything for them, including cashing out our retirement savings to pay their college tuition. But for many people, that would be a huge mistake — one that could eventually result in their children having to take care of them.

You might have heard about the college senior who called into an Atlanta radio talk show last month to complain about her parents. She had blown through the $90,000 college fund her grandparents had left her — spending on school but also clothes and a trip to Europe — and couldn’t pay her last year of college tuition. She said her parents refused to raid their retirement savings and would co-sign a student loan only if she got a part-time job.

If she thought she would get sympathy, she was wrong. People were stunned at her sense of entitlement. And her parents were absolutely right. But that doesn’t mean it was easy.

It is a bad decision to gut your retirement savings to pay your child’s college tuition. It’s also as bad a decision to defer retirement savings so you can save for tuition instead. But parents want the best for their children.

An Allianz LoveFamilyMoney survey found that this is especially true of single parents. Forty-five percent of single parents said saving for their children’s education was a priority in their financial plan. And 76 percent said they were stressed about saving for their children’s education while preparing for retirement.

Delvin Joyce, managing director of Prudential Advisors in South Florida, has had to talk clients out of picking tuition over contributions to their retirement plan. “I tell them there are no student loans for retirement,” he says. “Children can get a student loan. But if you are in retirement and didn’t save enough, there are limited options.”

“You don’t want to get to retirement and have depleted your savings so you can’t make ends meet,” says Jeanne Thompson, vice president at Fidelity Investments.

Thompson says Fidelity data shows a spike in people borrowing from their 401(k)s in the third quarter of every year. “We anticipate that it is to pay for college tuition,” she says. “Retirement money is for retirement. People should view the 401(k) as an untappable source.”

You may intend to keep working. Life may say otherwise.

And it’s not just college tuition. Providing financial help to your grown children, or any relative, can be just as dangerous if not done correctly.

“I’m seeing it more and more. In the slower economic recovery a lot of adult children are asking their parents for help,” says Anne-Margaret Carrozza, an elder-care lawyer in New York. “The home is often the parents’ biggest asset, so you see children asking parents to take out a home-equity loan or reverse mortgage. Too often adult children think of that as a resource that should be made available to them to help out for financial difficulties.”

Adam Nugent, chief executive of Foresight Wealth Management, says it’s mostly the children asking for help.

“Eight out of 10 times, it’s the kids,” he says. “We have several parents who have blown their whole retirement for their kids. When people are in retirement or close to retirement, before they give that kid that lump sum of money, they need to understand the overall implication on their retirement plan.”

You only get one shot at retirement. Plan accordingly.

Thompson says it is important that parents not always come to the financial rescue.

“You want them to build their own credit and build a track record,” she says. “It also helps them learn budgeting and to distinguish between what they need and what they want.”

The big problems come when the children can’t repay the loan. “The parent does not have many or any working years to replenish that money,” Carrozza says. “It can tear a family apart.”

She calls co-signing a loan for children or grandchildren a big mistake. “There is common misconception that co-signing is simply asking for a reference,” she says. “The entire amount of that loan appears on the co-signer’s credit report. It immediately lowers the asset-to-debt ratio and lowers the credit score. Today, credit card companies can automatically raise your interest rate if your credit score goes down.”

Because it is so difficult for some parents to say no, Carrozza says, she encourages clients to make her the bad guy. She will even write a letter outlining her objections that the parents can share with the kids.

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