Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 274

Don’t allow a BoMaD to ruin your retirement

This article is the third in a series written for Cuffelinks by leading retirement website YourLifeChoices. It reports on the financial impact on parents who are assisting adult children with loans to buy property or are allowing them to live rent-free at home.

What is a BoMaD and why should you care?

The BoMaD – or Bank of Mum and Dad – is the fifth largest lending institution in Australia, ahead of ING, Suncorp and Bendigo Bank. It is estimated to be lending $65 billion per annum, according to a Mozo survey in September 2017. That’s right, $65 billion a year is being transferred from the pockets of Australian mums and dads to their adult children to assist them in buying a house.

Children staying at home is more difficult to measure

While children are no doubt lovable, they can also be very expensive, particularly when it comes to reducing your retirement income. It’s not just in 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, and that 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!

YourLifeChoices runs frequent in-depth surveys on all things to do with retirement. In the recent 2018 Retirement Matters survey, we asked our 230,000 55–75-year-old members whether assisting younger family members was eroding their retirement savings.

Here is what we learnt:

  • 17% of respondents still have adult children living at home
  • Of these, only 58% are receiving contributions to the household expenses
  • Of those respondents with adult children at home, 32% 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 relaxed about long-term cohabitation with their adult kids. The extended family is 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.

Consider the money foregone

What is often overlooked is money foregone, and this is where a BoMaD can kill your future prospects. Retirement is fast becoming 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
  • energy bills
  • communication: internet, movie streaming, subscriptions, etc
  • maintenance
  • cleaning
  • gardening
  • insurances
  • 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 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’ June Retirement Affordability IndexTM reports that it costs a couple on a full or part age pension, living in their own home, about $42,830 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.

 

Kaye Fallick is publisher of YourLifeChoices, Australia’s leading retirement website for over-55s. It delivers independent information and resources to 250,000 members across Australia.

RELATED ARTICLES

Retirement and Antarctica: start early in setting your goals

A simple method to help mitigate sequencing risks

How much super is enough?

banner

Most viewed in recent weeks

Buffett's meeting takeaway: extreme caution

Warren Buffett's annual meeting of Berkshire Hathaway showed he has not been 'investing while others are fearful' during the crisis. lt's a reminder to take caution and preserve cash.

Welcome to Firstlinks Edition 356

Few investors are as influential as Warren Buffett, although for the moment, the market is ignoring his caution. The annual meeting of Berkshire Hathaway revealed Buffett did not use the heavy market falls in February to buy shares. Rather than 'buy when others are fearful', he was a net seller of US$6 billion for the quarter, disposing of all airline shares. Berkshire is sitting on US$137 billion in cash, suggesting he expects better buying opportunities to come.

  • 7 May 2020

The vibe of future returns: tell ‘em they’re dreamin’

It's the vibe, but not much else. Super balance calculations default to earnings rates of 7.5%, but that's in the past. Global experts suggest financial plans are now dreaming at this level.

Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.

Retiree spending patterns differ from most expectations

A study of actual spending habits shows retirees have a faster-than-expected drop-off in spending in later years, casting doubts on financial plans that assume increasing expenditure over time.

Welcome to Firstlinks Edition 357

There is a remarkable concentration similarity between the Australian and US stock markets that has delivered poor results for Australians and great results for Americans (and global investors). As the share prices of five Australian banks have tanked, the prices of five US technology companies have surged. Each group now represents 20% of their respective indexes, but the journey has been a disaster for many Australians.

  • 13 May 2020

Latest Updates

Economy

Baseline outlook for economic recovery is too optimistic

We cannot throw our hands up in the air and say 'this time around, it's simply too hard'. Having no macro view is unhelpful, but many of the baseline scenarios are overly optimistic, says the former CEO of Westpac and now Chairman of Chi-X Australia.

Strategy

Will our government embrace these three reforms?

COVID-19 is an opportunity for a crucial policy reset, but what does that really mean? Business is hoping for three big reforms, but there are massive barriers to be overcome.

Strategy

8 reasons business has little to learn from 'The Last Dance'

Everyone seems to be watching The Last Dance, a fascinating sports documentary about the pursuit of excellence by one of the greatest athletes of all time. Let's not stretch the business analogy too far.

Investing

Do long-term investors need to care about the ‘next big thing’?

When we look back five years from now, which companies will we regret not having bought at today’s prices? The next opportunities come from focusing on the long term, not the next few months.

Property

Not all non-residential real estate performs the same

Retail assets, particularly those focused on discretionary shopping, will continue to underperform and industrial and logistics assets will be the winners for the foreseeable future.

Economy

The uncertainties of using debt in a time of crisis

The ability of countries to support their economies today turns on fiscal practices set well before this crisis. Increasing levels of debt escalate overall risk, and tie our hands in the future.

Superannuation

Do you qualify for this help in the crisis?

It will surprise many that benefits worth over $8,700 could be available for a couple with a super balance over $4 million. Check if you are eligible for the Commonwealth Seniors Health Card.

Superannuation

What SMSF trustees need to know about benefit payments now

The government has announced initiatives to help people use their superannuation in response to the crisis, but for early access and drawdown changes, there are important rules to follow.

Sponsors

Alliances

© 2020 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use.
Any general advice or class service prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, has been prepared by without reference to your objectives, financial situation or needs. Refer to our Financial Services Guide (FSG) for more information. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.