Housing & Mortgage
Can You Really Afford to Help Your Kids Buy a Home?
Consider your own retirement needs first
Anyone with a millennial kid knows they have already had their share of financial challenges. The oldest millennials were launching into adulthood right around the financial crisis. Plenty were (are) saddled with student debt and have struggled to build a strong financial base. Now, along with younger millennials, they are wondering how they will ever be able to buy a home amid rapidly rising prices.
Among cities increasingly popular with millennials, the average home sale price in Denver is approaching $700,000. The average home sale price in Seattle is near $900,000, and the average home price in Austin, Texas, is close to $700,000.
Turning to the Bank of Mom and Dad
A 2020 report from the National Association of Realtors found that more than one in four first-time millennial buyers used a gift or loan to help with the down payment. Another report from a few years ago pegged the average down payment help from Mom and/or Dad at $39,000.
Those numbers are likely even higher now, as parents with fatter 401(k)s — the S&P 500 is up around 25% over the past year and has doubled over the past five years — may be even more inclined to chip in on a down payment to help their renter kids break into homeownership.
The down payment parent trap
There’s no denying the urge to help. But this is a decision that shouldn’t be left solely to your heart. Parents — and grandparents and aunts and uncles — need to make sure they can truly afford to help, or what level of assistance will not endanger their own financial security
Some considerations:
Opportunity cost. A $40,000 down payment gift today is a much larger hit to your retirement security. For a 55-year-old, if the $40,000 stayed invested and earned an annualized 5%, it would be worth more than $100,000 at age 75. You sure you won’t need that savings to help support an older you?
The tax bill on your 401(k). Anyone in their 50s and 60s today likely has done the bulk of their retirement savings in a traditional 401(k). With a traditional 401(k), every dollar you take out in retirement — and starting at age 72 you will be forced to take annual withdrawals regardless of need — is taxed as ordinary income. That means taking out a good deal more than the down payment you’re helping with to also cover your taxes. In addition to the federal income tax on your withdrawals, you need to factor in any state income tax as well. And you may also run into a portion of your Social Security benefit being hit with tax as well. Before you start giving away chunks of money to your kids, make sure you understand the after-tax cash flow you will have in retirement.
Your later-life household expenses could double. OK, there’s likely no way you’re oblivious to the recent spike in inflation. But even if we assume the major drivers of today’s inflation will abate, inflation is a retirement risk. At a benign 3% annualized rate of inflation, prices will more than double in 25 years. Anyone who is in the vicinity of 60 today, and is a non-smoker in average health, has around a 50% chance of living at least that long. Have you budgeted for inflation over a long retirement?
Medicare is going to cost you plenty. Most retirees are required to cover some of their healthcare costs once they are enrolled in Medicare. One cost is the monthly premium for medical care that occurs outside of a hospital, which is referred to as Medicare Part B. The minimum per-person monthly premium for Medicare Part B in 2022 will be $170.10. (High income enrollees pay even more.) That’s more than $4,000 in 2022 — the premium is raised each year — for a couple who are both enrolled in Medicare. And that’s just for the premium. What many people don’t realize is that Medicare has its own dizzying array of copays and coinsurance. Again, have you budgeted for this expense?
Thinking through these costs of retirement before you gift a down payment can save your entire family potential heartache years from now. What your kids really need from you is knowing you will be financially secure throughout your retirement. What you all want to avoid is a situation where years down the road your kids need to help support you. That’s a financial burden no parent ever wants to impose.
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