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Sacrificing Retirement Savings to Help Family Members Can Be a Mistake

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Here is what to consider when you are asked, in effect, to be the family bank.

Here is what to consider when you are asked, in effect, to be the family bank.

Photo: Martin Tognola

I hope to retire in the next year or two. A family member who is out of work is asking for help to pay some large credit-card bills. Is there a better or best way to tap my savings to do this?

Actually, I wouldn’t do any “tapping” until you and your family member have established—firmly—the limits of your generosity and whether this aid is a gift or a loan on your part.

This question highlights an interesting, and worrisome, trend among older Americans: their willingness, seemingly, to put their financial health at risk to support their families. In a study last year by Bankrate, half of surveyed parents (51%) said they have sacrificed, or are sacrificing, their retirement savings to help their adult children. In a report published in July by Edward Jones and Age Wave, with the Covid pandemic in full swing, 71% of surveyed retirees said they were willing to offer financial support to their family even if it meant jeopardizing their own financial future.

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Admirable? Sure. Imprudent? Maybe. And that’s the larger point: We can’t necessarily see how a sacrifice today might play out, and perhaps go awry, tomorrow.

Consider: In that same Edward Jones/Age Wave study, almost three quarters of retirees (72%) said one of their biggest fears is “becoming a burden on their families.” Well, most retirees have fixed resources. (Yes, the value of your nest egg, ideally, increases with time, but you’re also pulling money from that nest egg to support yourself.) If you place too many demands on your financial resources—for example, in the form of outsize and/or recurring contributions to family members in need—you could find yourself, at some point, leaning on the very people you’re currently supporting.

Put another way: Who is going to help you financially if the need arises?

Which brings me back to my first point. There should be a firm understanding between you and your family member about the boundaries involved: how much money you’re willing to provide—and no more. Otherwise, even the best of intentions can spiral out of control. Example: A daughter or son approaches you for help to start a business. You agree. And then comes a second request to “keep the ball rolling,” and, eventually, a third request to “build market share.” You get the idea.

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Second, your question indicates you’re planning simply to give money, as a gift, to your family member. But consider other options. Perhaps you can lend this person a portion of the amount owed (with the emphasis on “lend” and “portion”), which might allow him or her to refinance the balance of the debt. At the same time, you can set up a formal plan—in writing—to repay the loan at, say, 1% interest in monthly installments over, say, five years.

(A family loan should carry an interest rate that’s equal to or higher than the “applicable federal rate” published monthly by the IRS. Currently, that figure is about 0.4% for loans between three and nine years.)

Don’t misunderstand: I’m not suggesting that you, or any retiree, shouldn’t help family members. Indeed, I hope your support in this case will allow your relative to recover, even prosper. But please consider whether your nest egg, in the wake of your generosity, will be able to do the same.

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My husband died last year. The deed to our home is in his name and mine. My questions: Should I retitle the house in my name alone? And if so, how do I do this? I want to make sure there aren’t any questions about my ownership of the property.

You don’t have to take this step, but doing so likely will make your life easier in the future.

To start, your ownership of the house, in all likelihood, isn’t in question. Depending on the wording of your deed, you probably own the house outright. (More on this in a moment.)

That said, a new deed, one with your name alone, likely will save time and ease any legal or financial concerns in a future transaction, says Mindy Cleaveland, a certified financial planner with Modera Wealth Management in Westwood, N.J. That includes most notably, the sale of your home. For instance, in the absence of a new deed, a would-be buyer and/or the buyer’s lender likely would want paperwork that shows how and why you have come to be sole owner.

What’s more, obtaining a new deed now might spare you some painful moments in the future. “After losing a spouse, it’s better to take care of things like this up front, before too much time passes,” Mrs. Cleaveland says. “In this way, you avoid opening the wound again.”

As for the mechanics, again, start with the exact wording of your particular document. In many cases, a deed will show both spouses as “joint tenants with right of survivorship,” Mrs. Cleaveland says. (Translation: When your husband died, you automatically took full ownership of the home.) Or your particular deed, instead, might include the phrase “tenancy in common” or “tenants by entirety.”

The point: Rules about retitling vary from state to state. The wording on your document will help determine how to proceed where you live. In some instances, the process can be as simple as contacting your county clerk—or county recorder, or registrar of deeds—and, with a copy of your husband’s death certificate in hand, filing an application for a new deed.

The safe approach, though, is to talk with a lawyer or financial adviser who specializes in estate planning or real estate. In this way, you ensure that you’re taking the correct steps, whatever the current wording on your deed, for your particular locale.

Mr. Ruffenach is a former reporter and editor for The Wall Street Journal. His column examines financial issues for those thinking about, planning and living their retirement. Send questions and comments to askencore@wsj.com.

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