Could Your Grandchildren Ruin Your Retirement?

They were your pride and joy when they were younger, and now your grandkids are on the cusp of adulthood, brimming with promise but low on money. Maybe they’ve asked you to help, or maybe you just can’t stand the thought of them having to go without something they (or you) think they need.

What’s a grandparent to do? Probably not precisely what you’re thinking of doing, but you can still offer help. Before you promise or sign anything, ask yourself three questions.

What Are You Obligating Yourself to Do?

Students who have little credit history or income are often required to have co-signers. In most cases, co-signing is not a good idea, says Credit.com Director of Consumer Education Gerri Detweiler. If you co-sign, you are not vouching for your grandchild’s character and saying that you believe he or she will pay the money owed (say, for rent or to buy a car). You’re putting yourself on the hook for the entire amount of the loan or lease, should your grandchild not pay as agreed.

Jeff Motske, a Certified Financial Planner and the President of Trilogy Financial Services in Huntington Beach, Calif., says that it’s never a good idea for grandparents to co-sign for any type of loan for their grandchildren. The grandparents likely have no way to go back and start earning income again and can potentially end up with bills they can’t afford to pay.

If you’re offering to house your grandchild, make sure everyone is clear on expectations and responsibilities. Who pays for groceries? What about utilities? Or visitors? You may trust your grandchild, but can his or her friends be trusted with access to your home, including your medications, personal information and more?

Is This the Only Way for Your Grandchild to Get What He or She Needs?

Grandparents have taken out student loans for grandchildren’s college, allowed them to live rent-free in spare bedrooms and more. All in the belief that it’s the best way to ensure the young person’s future. In some cases, there are alternatives for the grandchildren — scholarships, commuter college or part-time jobs — that won’t jeopardize the grandparents’ retirement. They may not be your grandchild’s first choice, however.

Are You Afraid of Harming Your Relationship?

If you’re worried that saying no to co-signing or borrowing money for college is the beginning of the end of a close relationship, know that trying to help won’t necessarily preserve a good relationship. What could go wrong?

Oh, lots of things. Kathleen Shaputis, the author of “The Crowded Nest Syndrome: Surviving the Return of Adult Children,” allowed a grandson to live in her home for more than a year, and recently let him know he needed to find another place. “Living with the grandparents has become too cushy, with laundry equipment, free WiFi, cable and a stocked refrigerator,” she wrote in an email. “We had to start 2014 with telling him it was time to leave.”

What Grandparents Can Do to Help

You want your grandchild to be able to make his or her way long after you are unavailable for financial assistance, so becoming his or her piggy bank is probably not going to help long term. What might be useful, however, is helping your grandchild to establish good credit. Here are a few ways to help.

Make the Deposit for a Secured Credit Card

One way to do this might be to help him or her get a secured credit card. As its name suggests, this kind of credit card is secured by cash, and grandparents can provide this. Your grandchild will then have a credit card, and can make decisions about what to put on the credit card and will bear responsibility for repayment (and/or late fees, as the case may be with a young adult who is just learning about credit). This can be far safer than adding a grandchild as an authorized user on your own credit card, which would give him or her access to credit up to your credit limit. In that case, your grandchild would have all the privileges of a credit card but with none of the responsibilities. With a secured card, your grandchild has the opportunity to build credit in his own name. Handled well, this could lead to eligibility for a regular credit card, and you would get your deposit back. And allowing your grandchild to keep that deposit might be an added incentive for excellent credit behavior.

Lead by Example

Studies show that many young adults are uncomfortable with credit, and financial education is crucial. The Internet has an abundance of free resources, and Credit.com offers a free Credit Report Card, which updates your credit scores monthly, and shows which credit habits need to be maintained or improved. You should also be checking your own credit reports. As you do, show your grandchild how to check hers.

Though your grandchild may be sophisticated in other ways, many young people don’t know much about personal finance: “All they see are ATM machines where you put a plastic card into it [and] money comes out,” says Shaputis. “Or the parents charge everything, again a plastic card comes out and you leave the store with your bags.”

There are many great financial education books out there targeted at every age level imaginable. Grab one and give it to your grandkid.

Giving or Matching Funds

If grandparents can afford it, they can give money as a gift, financial planner Motske says. However, grandparents should understand that a grandchild who is 18 or older can spend that money however he or she chooses.
A second, and better option, is matching grandchildren’s savings, Motske says. “For instance, if a grandchild is able to save $100, grandparents can offer to match 50% up to a certain amount.” Motske said in an email. That way, grandparents make a financial contribution while also teaching the youngster to get into the habit of saving (and that is also a gift).

Make It a Loan

Another way to help, if you have the money to spare: Lend the money needed. If the loan is paid back as agreed, rest easy knowing your grandchild is willing and able to handle his or her finances. You could consider forgiving the loan after a certain number of on-time payments, or even returning the repaid money for use as a down payment on a home. For your own financial planning, you need to be able to consider the money a gift; any repayment should be considered bonus income. If you are going to lend money to a grandchild, be sure you could live comfortably even if the money were never repaid.

Regardless of how you do it, you want to offer limited help — limited, because your ultimate goal is to help this youngster learn to handle finances herself. Training wheels can be useful — but they’re not meant to be used forever.