The bank of mum and dad: How its affecting retirees

In recent years, the “Bank of Mum and Dad” has emerged as a significant factor in the Australian housing market. Parents, particularly retirees or those approaching retirement, are increasingly dipping into their savings, superannuation, and home equity to help their adult children purchase homes in an ever-more competitive property market. While this support can be life-changing for younger generations, it has also sparked concerns about the long-term financial wellbeing of the parents involved, potentially undermining their own retirement security.

The Rise of the Bank of Mum and Dad

The term “Bank of Mum and Dad” refers to the financial assistance parents provide to their children, particularly in the form of helping with home deposits, covering mortgage payments, or guaranteeing loans. The skyrocketing property prices in Australian cities such as Sydney, Melbourne, and Brisbane have made it increasingly difficult for first-time buyers to enter the market. Consequently, many young Australians turn to their parents for financial support.

According to a 2022 Mozo report, the Bank of Mum and Dad has become the country’s 9th-largest home lender, contributing over $34 billion to the housing market. On average, parents lend or gift their children around $90,000 to help with home purchases. While this generosity can provide younger generations with a much-needed leg-up, it can come at a cost.

Impact on Retirees

Many of the parents helping their children in this way are either retired or nearing retirement. For these individuals, giving large sums of money to their children often means sacrificing their own financial security. Retirement should be a time to enjoy the fruits of decades of hard work and savings, but the decision to support adult children financially can significantly strain a retiree’s resources.

1. Superannuation Impact: For those approaching retirement, withdrawing funds from superannuation accounts to help children can have long-lasting consequences. Superannuation is intended to provide retirees with a steady income, and drawing down large amounts before retirement can result in diminished returns and reduced financial stability during retirement years.
2. Increased Risk of Debt: Some retirees even take on new debt or leverage their own homes by using equity release schemes such as reverse mortgages. This can place them in a precarious financial position, especially if house prices fall or their children are unable to repay the funds.
3. Extended Working Years: In some cases, parents who assist their children financially are forced to delay their own retirement plans. Continuing to work beyond the planned retirement age can be a necessity to maintain a sufficient income, which can affect both health and lifestyle.
4. Strain on Lifestyle Choices: Withdrawing significant amounts of money to help children can limit a retiree’s ability to enjoy their retirement years as planned. Travel, hobbies, and other lifestyle choices may need to be scaled back, leading to a lower quality of life during retirement.

Long-Term Considerations

While the Bank of Mum and Dad offers a temporary solution to housing affordability challenges, it is crucial for retirees to carefully weigh the long-term consequences. Financial planners recommend that retirees avoid giving away substantial sums unless they are certain they will not need the funds for their own future needs. There are alternative ways to support children, such as providing financial advice or encouraging them to save more effectively, without jeopardizing a comfortable retirement.

Conclusion

The Bank of Mum and Dad plays an increasingly significant role in the Australian property market, but its impact on retirees’ financial wellbeing cannot be overlooked. While helping children purchase a home is a noble gesture, it’s important for retirees to consider their own long-term security. Consulting a financial adviser before making substantial contributions is essential to ensuring both generations can thrive financially without unintended consequences.

At JBS we are well versed to be able to help in this area and look forward to working with you and your children achieve the best outcome, as a reminder to those who may not know, we offer financial planning advice for our client’s children under 30 at no cost to them. Reach out and book a time to chat here.