A Wall Street Journal article recently reported that withdrawals from 401(k) plans exceeded new contributions in 2013 (the survey is a biennial survey with reports conveyed on odd years) after decades of expansion. That trend is expected to continue as Baby Boomers reach retirement age and begin drawing down their retirement savings. Of concern isn’t that the Boomers are drawing money down for the purpose that they put money in but that they are doing so to support their children. About a third of Baby Boomers support children or other family members. An Employee Benefit Research Institute study released in June found that the amount of money being transferred was large enough to be considered a major spending item in a household budget. This follows a trend that began in 1998. Not surprisingly, the money flow doesn’t usually go the other way around. According to the study, only 4 to 5 percent of older households receive money from their families whereas 38 to 45 percent transfer money to younger family members.
The average cash transfer for two year period when looking at all groups was around $15,000 for those who gave money either as a gift, a loan or support. The tongue-in cheek remark in a Barron’s article about the phenomena was that the silver lining for the parents was that they wouldn’t have to worry about estate taxes. What wasn’t said was that such contributions are likely to affect the retirement security of the parents. What is of concern is that existing surveys analyzing the financial security of older adults do not look at transfers between generations as a budget item. It’s not readily apparent whether such transfers will affect older adults because the surveys also show that the likelihood of transferring goes up with household income and often disappears at much lower income levels.
Finally, assuming that the Bank of Mom and Dad remains fiscally sound until the death of both founders, there’s still the risk that gifts now will reduce the inheritance for children and create a larger opportunity for family fights should one child appear to have benefitted more from his or her line of credit.