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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.

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