Will Helping Your Kids Delay Your Retirement?

Forget "Brother, Can You Spare a Dime?" The theme song of this recession might well be "Mother, Can You Write a Check?" The downbeat economy has resulted in increasing numbers of parents and grandparents helping out their strapped adult children and grandkids with home down payments, credit-card bailouts, and spare cash—often at the same time as parents are trying to confront new retirement budgets.

"We are seeing a ton of this," says Ross Levin, an Edina, Minn., financial adviser. "Sometimes it's a great idea and sometimes it is not. You have to make sure you put on your own oxygen mask first."

Some 62 percent of visitors to Grandparents.com have helped their kids financially in the past year, with 70 percent of that group handing over cash to help their adult children and grandchildren with daily expenses, says the site's CEO, Jerry Shereshewsky. Another popular category is housing; in the last year many parents have coughed up down payments to help their kids get into homes while the $8,000 first-time home buyer's credit was in effect.

Then there's the debt-bailout scenario. A survey recently conducted by Creditcards.com for NEWSWEEK found that 42 percent of folks with adult children have helped them pay off car loans, credit cards, medical bills, and more.

None of this is surprising to Shereshewsky, who sees the trend as a natural result of changing families and the distribution of wealth. "This is where all the money is—and it's where the money is, despite the fact that we've had this meltdown." In general, the baby-boom generation is far wealthier than their children are, and have a lower unemployment rate than 20-somethings. He says that the vast majority of multigeneration households now involve adult children (and sometimes their children) moving in with aging parents. Baby-boom parents generally aspire to helping their kids and their grandchildren and don't want to wait until they are dead to do it.

"You should give while you're young enough to enjoy the fruits of what you're doing," says Shereshewsky, who is personally considering getting a reverse mortgage on his home when it comes time to help his 20-something kids with home purchases.

But helping out the kids can have its downside, and that goes beyond the obvious, like depleted savings accounts. "Helping your child buy a house often deprives the kids of one of the first key stages of adulthood, when they are working, and trying to earn, and succeeding in eventually buying their own home," says Levin. "Sometimes the best help is just giving them support and guidance and wisdom, and letting them live in a home surrounded by people in the same financial shape as they are."

Paying off a child's or grandchild's debt can be problematic, says Levin. Parents don't want to see their kids get saddled with sky-high penalty rates and fees, but if they make it too easy for their kids to get out of debt, then it becomes just as easy for the younger generation to redig themselves into another financial hole. Siblings who don't get help can get jealous, and parents who are living lean so they can bail out their kids may start attaching more and more strings and resentments to their loans.

Experts like Levin recommend that families helping with their kids' debts work out some formal plans. They can offer to match payments their kids make, for example. They can use online sites like LoanBack.com and Prosper.com, which help individuals arrange intrafamily loans. "It's good to put something in place that is more formal than a handshake but less onerous than a trip to a lawyer's office," says Hill Ferguson of LoanBack.

There are also tax and legal implications that families should consider. Too much help can make families run afoul of gift-tax rules or cost recipients valuable tax breaks for mortgage interest or child-care expenses, if they aren't handled right.

Finally, generous parents and grandparents should remember that helping their kids should come after they've satisfactorily planned for their own retirement. If they end up better off than they expect, they can always help out later, sending grandchildren to school and the like. While it may be disappointing to not be able to help out as much as you like, it's not the worst thing. Financial independence could be the most generous gift of all.