Would you rather leave your children a substantial inheritance in 20 or 30 years, or help them financially when they need it most?
It's a question many Australian parents face as they approach or enjoy retirement.
With high property prices, mortgage repayments and living costs placing pressure on younger generations, it's understandable that parents want to help their adult children get ahead.
Perhaps you'd like to help your children buy their first homes, reduce their mortgages or ease the financial pressure of raising a family.
And there's something rewarding about seeing your children benefit from your hard work while you're still around to enjoy those moments with them.
But before making a substantial financial gift, there's an important question:
Can you afford to help your children today without compromising your own financial security in retirement?
With careful planning, it may be possible to achieve both objectives.
Your Retirement Needs to Come First
Before deciding how much you can afford to give away, it's important to understand how much you'll need to fund your retirement.
Retirement can last 20, 30 or more years, and your financial needs will likely change throughout that time.
In the early years, you may want to travel, pursue hobbies and enjoy greater financial freedom. Later, your spending priorities may shift towards healthcare, home maintenance or additional support as you age.
Unexpected expenses and potential aged-care costs also need consideration.
This is where retirement planning becomes particularly valuable.
By modelling your expected income, expenditure, superannuation and investments, you can better understand whether your financial resources are likely to support your desired lifestyle.
Importantly, these projections should consider different scenarios, including lower investment returns, higher inflation, unexpected expenses and living longer than anticipated.
While projections can't guarantee an outcome, they can help you understand the potential consequences of different decisions.
The objective isn't necessarily to preserve as much wealth as possible. It's to enjoy your retirement while maintaining financial security and flexibility for the future.
Once you've established what you need, you can explore whether there's capacity to help your children.
Could Helping Your Children Now Make a Bigger Difference?
Imagine you have three adult children.
Two are saving for their first homes, while the third is managing a mortgage and the costs of raising a young family.
You'd love to give each of them $150,000.
That's $450,000 in total — a substantial amount to give away.
However, suppose your retirement projections suggest you could afford this assistance while still maintaining your preferred lifestyle.
Would it be better to keep that money invested or help your children today?
The potential benefit of reducing a mortgage
Let's assume one of your children has an owner-occupied home loan charging 6% interest.
Reducing their outstanding mortgage by $150,000 could initially save approximately $9,000 in annual interest, assuming the interest rate remains unchanged.
Actual savings would depend on repayments, interest rates and the remaining loan term.
Over time, the savings could be substantial, particularly if your child maintains their existing repayments and pays off the mortgage sooner.
Importantly, interest on an owner-occupied home loan is generally not tax deductible. Reducing that debt can therefore provide a meaningful after-tax benefit.
Of course, retaining the $150,000 in your retirement investments means preserving access to that capital and any future investment returns.
Giving it away involves sacrificing that financial flexibility.
Neither option is automatically better. The decision needs to consider your retirement needs, investment returns, tax position and personal priorities.
However, it highlights an important point:
Money provided today may have a greater practical impact on your children's lives than the same amount received as an inheritance decades later.
Sometimes, when you provide financial assistance can be just as important as how much you provide.
How Much Can You Realistically Afford to Give?
Even if you've accumulated substantial retirement savings, deciding how much to give shouldn't be based solely on your current superannuation or investment balances.
What matters is how that decision could affect your finances over the remainder of your life.
Financial modelling can help compare different scenarios, such as:
Retaining your existing retirement savings.
Giving each child $100,000 today.
Giving each child $150,000 today.
Providing smaller amounts over several years.
Each option affects your remaining assets, future investment earnings and financial flexibility.
A substantial gift might appear affordable under favourable conditions but create pressure if investment markets fall, living costs increase or unexpected expenses arise.
Modelling these possibilities can help you understand the trade-offs and determine whether providing assistance is realistic.
The important question isn't simply whether you have enough money to make a gift today. It's whether you can afford that gift without compromising your future retirement security.
Don't overlook Centrelink
Giving money to your children could also affect your Age Pension entitlements, both now and in the future.
Under Services Australia's gifting rules, the gifting free areas are generally:
$10,000 in a financial year.
$30,000 over five financial years, with no more than $10,000 counted within the gifting free area in any one financial year.
These limits apply to a single person or a couple combined.
You can give away more than these amounts. However, the excess is generally treated as a deprived asset and continues to be assessed under the assets and income tests for five years.
For example, if a couple gives their child $150,000 and has made no other relevant gifts, generally $140,000 would continue to be assessed for five years.
Gifting may also affect certain aged-care means assessments.
These consequences are worth understanding before making substantial gifts, particularly if you may become eligible for government assistance in the future.
Should You Give the Money or Lend It?
Another consideration is how you provide financial assistance.
An outright gift may be straightforward, but it means permanently giving up access to that money.
Alternatively, a family loan could provide assistance while preserving your legal right to repayment.
However, family loans introduce their own risks.
What happens if your child experiences financial difficulties, separates from their partner or can't repay the money when you need it?
A genuine family loan may also continue to be assessed as an asset for Centrelink purposes.
If you're considering lending money, obtaining legal advice and documenting the arrangement can help clarify everyone's rights and obligations.
Consider Your Other Children and Estate Planning
Financial assistance isn't just about the numbers. Family relationships and estate planning are equally important.
If you have multiple children, should you give each the same amount or provide assistance according to their individual needs?
And if one child receives substantial financial support today, should that be reflected in their future inheritance?
There's no universal answer, but these decisions can influence family relationships and expectations.
Relationship breakdowns, financial difficulties and changing family circumstances may also create complications.
Reviewing your estate plan with a qualified legal professional can help ensure your intentions are appropriately documented.
Open family conversations may also help minimise future misunderstandings.
Finding the Right Balance
For many parents, helping their children financially is about more than transferring wealth.
It's about creating opportunities, reducing financial stress and seeing their children enjoy greater financial independence.
But your retirement savings also have an important purpose — supporting the lifestyle you've worked hard to achieve and providing security throughout your later years.
The challenge is finding the right balance.
By understanding your retirement needs, exploring different financial scenarios and considering the Centrelink and estate planning implications, you can make a more informed decision about whether to help, how much to provide and when that assistance may be most valuable.
Because the best financial gift isn't necessarily the largest one. It's the one that makes a meaningful difference to your children's lives without compromising your own financial future.
General Advice Warning: This information is general in nature and does not take into account your personal objectives, financial situation or needs. Consider whether it is appropriate for your circumstances and seek professional financial advice where appropriate. Examples are illustrative only. Financial outcomes and applicable legislation may change. Seek relevant legal or taxation advice before making decisions.