Parenting in 2021 means cramming the first home payment for kids into your retirement plan

Every time there is a global financial turmoil, the obligations of parents to their adult children increase.

Remember the “Boomerang Kids” of the 2000s? The economic turmoil caused by the global financial crisis led them to return home with their parents, who found themselves providing all kinds of financial support. Not just extra groceries for the family, but paying mobile phone bills, supporting car insurance premiums, helping with student loans, and more.

The COVID-19 pandemic is quietly adding a new burden to parents. It takes what was once a habit of helping your adult children buy a home and turns it into a gift-giving duty worth tens of thousands of dollars. Parents ask, “How will my children enter the increasingly expensive housing market across the country?”

We may soon need to rewrite the handbook of financial planning for families. Parents would struggle to retire in the child-rearing years, then dump it when their kids became financially self-reliant. Moving home grown children may have slowed this progress, but it wasn’t a potential cause of difference in the same way that financing a down payment for a home would.

Can families afford the down payment assistance we see these days and a well-funded retirement? The country’s financial planners have their hands full trying to answer this question. Will we see parents use their registered retirement savings plans for themselves and set aside their own tax-deductible savings accounts to make a home down payment for their adult children?

The amount of money going into down payment gifts for parents is increasing at the same time as levels of concern about saving for retirement. A recent survey of 300 Canadians by Natixis Investment Managers found an increased level of pessimism about retirement as a result of factors such as inflation, low interest rates and government debt.

There’s no doubting what should be parents’ top saving priority – it’s retirement. Cover it, and install it. Next, find a way to help your kids if that’s what you want to do.

So says the personal finance man. What parents are actually doing is responding to a new demand for their finances to support their children.

Parental financial support has been a part of home buying ever since, but it has now reached a tipping point. A recent report by CIBC Economics reported that nearly 30 percent of first-time buyers receive cash gifts for advance payments, and the average amount of assistance is $82,000. In 2015, about 20 percent of buyers received an average of $52,000.

The reason why more parents are handing over more money to their adult children to buy homes is that there is no other way for these young people to enter the housing market right now. The pandemic has already accelerated home price increases, far outstripping the ability of twenty and thirty-somethings to save for a down payment.

Ten years ago, I wrote a book called How Not to Go Back to Living With Your Parents: The Complete Young Man’s Guide to Financial Empowerment. I remember a narrative at the time about parents who were burdened with the cost of having to support adult children who, by the standards of ages past, had to be financially self-sufficient.

Now, we have parents who willingly, albeit strongly, commit much larger financial commitments. The CIBC report found that in addition to support for first-time buyers, nearly 9 percent of buyers who move into the market have access to help from parents.

Some of this parental support is just an early legacy. A high net worth couple might hand $82,000 to a child now rather than wait decades and pass it through their property. But CIBC Economics has estimated the total amount of parental down payment support over the past year at $10 billion. Could that amount of money, paid to nearly one in three buyers, come from high net worth families?

The most likely explanation is that the demographics of parents who help with down payments are growing along with the amount of money given. It has become a norm to give your adult children tens of thousands of dollars to buy a home. Where you once stepped in with down payment money, you are now the main source of funds.

Then the next financial crisis will come. Don’t rule out this finding: Retired parents help fund their children’s retirement.

Are you a young Canadian and have money on your mind? To set yourself up for success and avoid costly mistakes, Listen to the Globe Award-winning Stress Test podcast.


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