I recently met with a potential new client, and unfortunately, I had to give them bad news. What I told them is that based upon their current financial situation, they could not afford to retire. The couple was shocked when I gave them the news because as they said, they had met a few years ago with another financial advisor who told them they had enough to retire. When they showed me the letter that the other financial advisor had written them, I told them I agreed with everything the financial advisor had said. However, as I explained to them, the information they provided the other financial advisor and what they provided me was different. The difference was not in their portfolio, but rather, in their cost of living. What changed was that they decided they did not want their twin grandchildren to be burdened with student loans and thus, they told their grandchildren they would pay for their college costs. As I explained to the couple, since they have agreed to accept that additional burden, the numbers for retirement no longer worked in their favor. I recommended to them that they either had to work for a number of years, or they have to cut back on their other expenses.
Helping to financially support a loved one is wonderful; however, before someone commits to financially supporting others, they do have to make sure they have the resources to support themselves. Throughout time, grandparents have always helped their grandchildren. However, in today’s world it has become much more problematic. The reason is two-fold. The first is that we are all living longer. When it comes to planning for retirement, someone who retires in their 60s has to plan for a 20 to 30 year retirement. That requires considerably more resources than if you were only planning for a 10 to 15 year retirement. In addition, we all know that the cost of living keeps rising. Therefore, for someone to maintain their standard of living, they must have a rising income throughout their lifetime. It is these two factors that have changed the dynamics of retirement so considerably.
The number of grandparents who are helping their grandchildren has increased substantially over the last number of years. With the cost of college rising, many grandparents have stepped up and have assumed the responsibility of paying for their grandchildren’s college. As I said, this is wonderful; however, before a grandparent commits themselves to cover those costs, they have to be aware of the consequences. The decision to help someone financially has to be more than an emotional decision. It has to be based upon your finances. After all, if you choose to help others and then you run out of money, who is going to help you?
You see this frequently today, where grandparents are running out of money, thus putting themselves in very difficult financial positions because they did not first take into consideration their finances. I strong recommend, particularly for those who are retired and who are getting ready to retire, to think twice before they take on additional financial burdens. Even though you may not be able to help financially, there are other ways grandparents can help their grandchildren. Grandparents can recommend alternatives to their grandchildren such as attending a community college for the first couple years, or using in-state universities as opposed to an out-state school. In addition, grandparents can also help the grandchild aggressively look for scholarships and other types of aid.
I certainly don’t like to tell a grandparent that they should not help their grandchild through college. It is not something that I enjoy. However, my philosophy is that you should be upfront and honest with people, especially when it comes to their finances. Therefore, for grandparents whose heart tells them they should help their grandchildren, my advice is, before you let your heart do the talking, review your finances to make sure you are in a position to help.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at email@example.com.