It’s that time of year when many retirees think about financially helping their adult children and grandchildren or donating to the charitable causes they care about. At this stage in life, it’s quite natural that retirees want to give back.
However, it’s important not to give too much, so you don’t jeopardize your own financial security. Let’s look at three ways you can help your family and support your favorite charities without increasing the odds that you might run out of money during your lifetime.
Method #1: Put your own retirement finances in order.
Pre-retirees and retirees need to make sure they balance the “magic formula for retirement security” for the rest of their lives:
I > E (income exceeds living expenses)
This means you need to understand your sources of lifetime retirement income, then manage your living expenses to fit within your regular retirement income for the rest of your life.
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Not only will this keep you financially stable, but it also means you won’t run out of money and leave your kids the “legacy” of needing to support you financially, or having you move in with them because you can no longer afford to live alone. These results have the potential to drain their own savings and jeopardize their retirement.
Instead, you’ll want to demonstrate a positive example of being able to manage your finances that can inspire and guide your adult children when they reach retirement age. In and of itself, your example is a powerful way to help your family with their long-term financial security.
In addition to setting a great example, being able to balance your own lifetime income and expenses gives you the foundation to implement the next two methods of helping family and charities.
Method #2: Budget for regular giving.
Develop a budget for giving to family and charities, and consider it part of your monthly “E” that goes into balancing the magic formula described previously. If your lifetime income can cover your living expenses and your giving, then you aren’t jeopardizing your own financial security.
Thinking of your giving as a regular living expense can also help you prioritize your own spending. For example, if giving is really important to you, you might find other items in your budget that you can reduce or eliminate in order to preserve the magic formula balance.
Method #3: Responsibly plan one-time giving.
In some situations, it might not be practical to budget for regular financial donations to children or charities. For example, your adult children might need a single lump sum of money because they need help with a down payment on a house. So, how can you decide if you can afford to help them?
In this case, you can estimate how much your annual retirement income that’s generated by your savings will be reduced if you give them a lump sum. That will help you decide if your retirement savings, after being reduced by the amount of that gift, will still generate enough money to cover your living expenses.
The amount of the reduction in your retirement income will depend on how you deploy your savings to generate retirement income. Various retirement income generators produce different amounts of retirement income. As a result, it’s important to use the same method you’re using for generating retirement income from your savings to evaluate whether your reduced monthly income will still cover your standard expenses.
Bill and Eileen’s example
To help you understand this method more clearly, let’s look at an example from my book Don’t Go Broke in Retirement that illustrates how to analyze the feasibility of one-time giving.
Bill and Eileen, a hypothetical couple who are both age 75, have a retirement savings balance of $400,000. They use the IRS required minimum distribution (RMD) to determine the amount of their annual withdrawal from savings. In 2020, their annual withdrawal using the RMD method at age 75 is 4.3669% of their savings, or $17,468.
They’ve decided they want to give $50,000 to their son and daughter-in-law to help them with a down payment on a house. But can Bill and Eileen afford to do that?
In this case, after making the gift, they’d have $350,000 in savings remaining to generate their retirement income. This amount would produce an annual retirement withdrawal of about $15,284, using the RMD methodology at age 75. This represents a reduction of about $2,184 in the first year after they give away $50,000, or about $182 per month. The amount of reductions in future years will depend on the investment return on their savings, but it would be in the ballpark of the first-year reduction amount. By doing the math, they have a rough estimate of the annual amount of lifetime retirement income they’ll have to forgo each year for the rest of their lives as a result of making this gift.
Finally, don’t forget …
…there are other ways to give back to your family and causes. Retirees are often time-rich, so you might also be able to help your family members and charities by giving of your time. Your family will treasure the memories of that time spent with them long after you’re gone.
It’s a very good use of your time to analyze how you can responsibly support your family and the causes that are important to you. By doing so, you’ll know that you’re doing the best you can.