Most parents are keen to help their adult children, but at what price?
There’s a lot of expert opinion about the so-called BoMaD – Bank of Mum and Dad – but few commentators have bothered to analyse what it does to the retirement income and savings of retirees.
First though, check out this video on www.domain.com.au where a smiling millennial tells his peer group how to save up to $30,000 a year at the Hotel of Mum and Dad (HoMaD). Fabulous savings for the young man in just 12 months!
But let’s look more closely at the BoMaD. What is a BoMaD and why should you care? What will hosting this handsome young guy, on the family room sofa, mean for your future income?
The BoMaD is the fifth largest lending institution in Australia, after the Big Four banks and just ahead of ING, Suncorp and Bendigo Bank, and is estimated to be lending $65 billion per annum, according to a Mozo survey in September last year. That’s right, $65 billion is being transferred from the pockets of Australian mums and dads to their adult children to help them buy a house.
If you are over 50 and have adult children still living with you, it’s time to pay attention.
While children are no doubt lovable, they can also be very expensive – particularly when it comes to reducing your retirement income. And the impact is not just on the headline fact of parents lending grown-up children money to buy property.
There is a quieter, more insidious erosion of retirement savings and income which occurs when adult children live at home for extended periods without contributing to household expenses. This is a less spectacular, difficult-to-measure version of the BoMaD. And it’s not a loan, but a gift!
In YourLifeChoices’ most recent 2018 Retirement Matters survey, we asked our 230,000 55 to 75-year-old members whether assisting younger family members was eroding their retirement savings.
Here is what we learnt:
- 17 per cent of respondents still have adult children living at home
- of these, only 58 per cent are receiving contributions to household expenses
- of those respondents with adult children at home, 32 per cent believe their retirement income is reduced by this arrangement
- the median amount respondents projected they were losing per annum was $10,000, within a range of $5000 to $50,000
So, what does this mean for you and your retirement? This is tricky emotional territory.
As reported above, most parents are very relaxed about long-term cohabitation with their adult kids. The extended family can be a traditional source of strength, support, love and fun. There’s a lot to like about this way of living, and it really is the very basis of community.
But financially, it can be an extremely lopsided arrangement. The great ‘risk shift’ of retirement income, as identified by American academic Jacob Hacker in 2006, suggests that we are all basically on our own when it comes to creating a retirement nest egg and managing it successfully.
What is often overlooked is money foregone, and this is where a BoMaD can kill your current and future prospects. As we are well aware, retirement has fast become a user-pays system, exacerbated by the increasing need for personal income to cover both health and aged care.
So what can you do if you love having your adult children living at home, but fear this is having a negative impact on your finances?
You could start by recognising that family comes first, and if you are happy to have them at home, then that is where they belong. But make sure everyone is paying their way.
Think back to your early days of share houses and flatmates. There are mutual costs which include:
- mortgage repayments and council rates
- energy and water bills
- communication: internet, movie streaming, subscriptions, and so on
- home maintenance and repairs
- food and groceries.
When you stop and itemise the expenses, you realise that it costs a lot to run a home, even one which is fully owned. So create a spreadsheet with all household expenses listed, total it and divide it equally by all adults aged 21 and over. Set up a new bank account to be managed by the home owner, or whoever’s name is on the lease if you are renting.
Request all ‘guests’ organise an automatic payment from their own bank account into the household expenses account, equalling their share of these expenses, on the first of the month, every month.
When sufficient money is collected, organise for automatic payments of all household bills on their due date, and a payment covering ‘general monies’ (i.e., money for consumables, such as food and other supermarket items) to be made monthly into the homeowner’s account to cover these extra, often unnoticed, expenses.
This will hopefully remove all potential arguments and ensure that a fair share of the expenses is paid by all, as painlessly as possible.
It may sound like an overly formal system, but rent-free kids eating you out of house and home is hardly the answer, either. Yes, you love them dearly, but you also have to plan for your next 20 or 30 years of paying bills, perhaps when your health is far less robust than theirs.
YourLifeChoices’ September Retirement Affordability Index™ reports that it costs an average couple on a full or part Age Pension, living in their own home, about $42,995 per annum to cover all expenses. If these costs are higher because you are accommodating your grown-up kids, it’s up to you to ensure you are not digging into your savings to support them forever.
At the very least, it is worth thinking about, isn’t it?
This is an edited version of an article first published on Cuffelinks.
What about you? Are you a BoMad or running a HoMad? Is this harming your retirement income? What’s your story?
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