The smart way to give to your grandkids

Published: Nov 13, 2012 7:00 p.m. ET


Give to your grandchildren, or save for retirement?



It is only natural for grandparents to want to help their grandchildren financially. But the weak economy and job market are spurring a growing number of older people to give until it hurts.

Financial planners say that is a mistake. Grandparents living off their savings should consider how the gifts they make now, by drawing down their investment principal, will affect their future earnings. In the worst-case scenario, such gifts could wipe out their savings before they die.

“It’s a delicate balance,” says Sandra Timmermann, a gerontologist who directs the MetLife Mature Market Institute, “between wanting to help your family and making sure that down the road you’re not a burden.”



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The good news is that there are ways to keep giving now while avoiding trouble later in life. Among other strategies, experts suggest paring gifts when portfolios sputter, making loans with strict repayment terms instead of gifts, using gifts to teach grandkids broader lessons about financial planning and leaving tax-free gifts after you die to make sure you don’t run out of money.

All told, there were an estimated 65 million grandparents in the U.S. in 2011, according to independent demographer Peter Francese. Within eight years that number is expected to reach 80 million, or nearly one of every three adults.

There are no federal data tracking grandparents’ gifts to grandkids. But in 2010, households headed by people ages 55 or older spent $9.7 billion on infant food, equipment and clothing, along with toys, games and tricycles for older kids—a 143% increase from 10 years earlier. And they spent $2.4 billion on elementary and secondary school tuition, triple their contribution in 2000, according to the Bureau of Labor Statistics. A third of the grandparents surveyed by MetLife in April who said they give to their grandkids said they did so despite worries about the impact on their own finances.

The main culprit for the rise in giving is the weak economy, which is hampering efforts by the grandparents’ children to care of their own kids, Timmermann says. Financial planners say they see more grandparents giving when their children are coping with divorce or are saddled by debt.

Dorothy Nelson, a 73-year-old retired widow in Lindenhurst, N.Y., spent much of her savings over the past decade helping her children pay for housing, oil bills and other expenses for her eight grandchildren. The money covered a $40,000 bedroom addition, $60,000 in mortgage payments and other big-ticket items.

But she found herself running so low on savings that she had to take out a reverse mortgage to pay property taxes, and started volunteering through a foster-grandparent program that provides a small stipend.

“You live for your children and your grandchildren. You want to make the world a little better place for them. In the meantime, you forget about yourself,” Nelson says. “If I had to do it over again, it would be completely different.”

So, how do you help your grandchildren without wrecking your own financial future or creating a sense of entitlement? Here is the collective wisdom of grandparents and financial planners across the country.

Pare your gifts to offset the pain. Giving to grandchildren isn’t an all-or-nothing proposition. You might be able to stay on track just by scaling back a bit.

Donald Rhoads, a 74-year-old retired geologist and entrepreneur in Falmouth, Mass., was hoping to contribute $10,000 a year to each of his four grandchildren’s college costs, for a grand total of $160,000. Rhoads and his wife have two sons in their 40s, “a time of their life when it’s very stressful financially. They’re trying to save for retirement at the same time tuition’s coming up,” he says.

The way the grandfather sees it, his sons can use the money more now than as an inheritance later.

The couple has about $1 million in investible assets, including a fixed-income pool that provides Rhoads and his wife with lifetime income, a conservatively invested pool from which they plan to pull the college contributions and a higher-risk pool they hope to leave to their two sons and four grandchildren.

When the couple’s investment adviser, Kenneth McGuire, ran the numbers, he concluded that Rhoads and his wife were putting their retirement plan in jeopardy.

McGuire suggested the grandparents contribute $5,000 a year for each grandchild, $80,000 in all. “If they’re fortunate, they might be able to contribute more from year to year, and if they have excess dollars when the last child finishes, they could pay off any loans, or at least contribute toward that,” he says.

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