There are approximately 10 million baby boomers in this country who are part of the “sandwich generation” — those “sandwiched” between aging parents and adult children who require some degree of financial help. And when it comes to loaning money, balancing the needs of family members can be especially dicey for boomers. CNBC’s Sharon Epperson shares smart advice to help you navigate these difficult decisions:
Millions of Americans in their 40s, 50s and early 60s are being financially squeezed by their adult children on one side and aging parents on the other. Many of these baby boomers are also what I call “sandwich lenders” who want or need to loan money to their children and their parents. There are no exact figures on how much money boomers are lending to their loved ones. However, VirginMoneyUS, a firm that specializes in formalizing loans between relatives, estimates that about $53 billion in loans are made between family members every year (based on Federal Reserve Board data). About 75 percent of those loans, or $40 billion, are parent-to-child loans; one-quarter, or about $13 billion, are child-to-parent loans — and those loans are growing the fastest.
Boomers may want to be financially generous, but they may fail to recognize how these “sandwich loans” will impact their own ability to save. A recent study by Ameriprise Financial found nearly half of all boomers are helping aging parents financially: buying groceries, helping with medical expenses and utility bills, contributing to rent/mortgage payments or paying for long-term care. That’s one side. On the other: About 37 percent of boomers have co-signed a loan or lease agreement with their adult children — adding to their financial strain. Meanwhile, recent data from the Employee Benefit Research Institute reveals that one in four boomers have saved less than $10,000 and 45 percent have socked away under $50,000 for their retirement.
Of course, in some cases, loaning money to your child or parent is the right thing to do and/or it must be done. Just be sure you do it right. I’ve talked to many financial advisers and here are some rules they agree on:
Don’t loan money you can’t afford to lose
You may have the best intentions and so does the borrower, but in case they are unable to pay you back, make sure you can live without that money.
Don’t loan money that jeopardizes your own financial future
Don’t raid your retirement accounts or take out a 401(k) loan to help out a family member.
Don’t co-sign for a loan unless you are able to pay it yourself
Also, monitor the loan to make sure it is being paid on time. After all, it's your credit.
Discuss the details of the loan in advance
Are there any strings attached? If money is earmarked for a car, can it be any type of car? When does it need to be repaid, and at what interest rate? If a check is late, is there a penalty? If you don’t lay everything out on the table, you could be setting yourself up for misunderstandings.
(Also, if the interest rate is on the loan is below the one set monthly by the IRS, the loan may need to be treated as a gift, which can have different tax implications. Each parent is allowed to give a child up to $12,000 a year before it is subject to gift tax.)
Formalize the terms of the loan
For help, look Web sites such as www.virginmoneyus.com (formerly Circle Lending) or www.prosper.com. For $99, you can arrange a private loan to your adult children or parents. Virgin drafts a simple agreement and repayment schedule. Prosper.com is modeled after eBay. The site allows borrowers (children/parents/friends/other family members) to create a Prosper.com listing to request a loan of up to $25,000 and invite parents (or other Prosper members) to bid on slices of the loan.
Consider other family members when making the loan
You may have your reasons for loaning to one child and not another or for not taking any punitive action if the loan is not repaid, but recognize that other family members may not see things the same way as you. The loan — even though given with the best intentions — may foster feelings of favoritism. (An estate planning tip: Mention the loan in the lender's estate plan. For example, if the lender dies, the loan could be forgiven but the amount of inheritance for the child is reduced.)
For “sandwich lenders” the next question is often who should you help first — your child or your parent? There’s really no steadfast rule on that; it would probably depend on who is most desperate and unable to come up with the money on their own. If your parents are retired, are not in great health, and cannot generate enough income to live on, they may seem more in need of a loan than your adult children who are in their prime earning years. But think about this: Do your parents really need to live in the same home that they’ve been in for the past 35 years? Would selling the home and using the proceeds to pay down debt or pay for living expenses make more sense financially? Even if you can afford to loan them the money, paying for a financial adviser or paying their long-term care insurance premiums may be a better investment for everyone.
Perhaps your middle child is the one who most desperately needs your aid. College expenses got to be much more than your son could handle and you don't want him to graduate with credit card debt on top of student loans. Or maybe you’re thinking of loaning your younger daughter money for a car to use to get to and from her classes. Will these loans help your children become financially disciplined? If not, invest your time instead. Help them set up a budget for the extra expenses and/or debts, take them to a money management seminar or assist them in finding a certified credit counselor.
CNBC personal finance correspondent Sharon Epperson is the author of “The Big Payoff: 8 Steps Couples Can Take to Make the Most of Their Money — and Live Richly Ever After" (HarperCollins).