How to Help Family Members Without Hurting Your Own Finances

Family financial demands can pose a challenge in saving for retirement.

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The second retiree gave his children small gifts for birthdays and holidays, but believes it is time to enjoy his retirement and plans to spend his money on personal hobbies and interests. Asked to indicate which philosophy they agree with more, nearly two-thirds of respondents showed support for the second retiree, who is giving gifts to his children but is mostly focused on enjoying his retirement.

[See 10 Important Ages for Retirement Planning.]

For Steve Kluever, his parents' perspective and similar tales from many of their neighbors in their 60s, 70s, and 80s hit a personal and professional nerve. He's vice president of product development for individual annuities at Hartford Financial Services. His parents don't need to help his immediate family or his successful sister's, but they still felt an obligation to keep their nest egg intact for their long-term care and their estate. Kluever thought it a shame that they didn't allow themselves to splurge a little.

He saw a need to increase the flexibility of variable annuities and has helped develop annuities, which his parents now use, that combine the protection of insurance (the death benefit does not decrease even when income is withdrawn) with an income portion and a growth component linked to the stock market. Nicknamed a "live and give" annuity, it's just the kind of approach that may appeal to some investors who want an income stream they can use now and in their 90s, and still have something to leave behind.

Family bank. There are some circumstances for which intra-family loans make sense in the best and worst of economies. Tapping mom and dad for the funds to finance a home, start a business, or build a nest egg lowers the borrower's rates and allows the senior generation to still collect modest interest payments. Both generations can benefit because the loan legally reduces a future estate-tax bill. That makes intra-family loans an attractive alternative to traditional loans for adult children and the sometimes-complicated tax shelters sought by their higher-net-worth parents.

"Ideally, your son or daughter would be able to pay you a fair rate of interest each month, providing you with some cash coming in [the IRS also wants a market interest rate or they'll look at the loan as a taxable gift]. However, don't do this if you can't afford to lose the principal," says Sheri Samotin, of consultancy LifeBridge Solutions, in a blog post. "While your child might have every intention of paying you back, that might never happen. Will you have enough money to take care of your own needs under that scenario?"

"The most important thing to realize is that money that you give away, encumber, or spend on behalf of your children today is money that very likely won't be available to you in the future if you need it. Be sure that your desire to help doesn't set you up for turmoil later," Samotin says.

Consider your child's money personality, say Scott Palmer and Bethany Palmer, financial advisers and authors of The Money Couple blog. Unforeseen economic circumstances have hurt even the best of planners, but some adult children may simply be bad with managing money and your assistance will perpetuate their lax habits. It's also okay to loan to one child and not another if, in fact, the reasons for needing help are different. The Palmers say it's important for a boomer couple to be a united front when it comes to offering financial aid to the next generation. Don't add to a potentially stressful situation with deception, handing out money without your partner's knowledge. Bottom line: It's okay to say no. Hurting your own finances now could potentially burden your children later if you're the one with palm extended.