3 Reasons You Should Never Use Retirement Savings to Help Your Kids

It's like hitting the jackpot when a child is born into a family that loves and protects them. And if, as they grow, a child's family provides them with the tools they need to get ahead, the lucky streak continues. While the word "no" is easy enough to say, it's tough to turn away when a child is hurting.

The same parents who adore their children from birth are also among the most generous. It may be a desire to be around long enough to see their children succeed. When a parent moves money from their bank account into their child's account, the practice carries certain risks. Here are three of them. 

1. You're on your own

Let's say you're single and retired at age 62, the moment you were eligible. You have $250,000 in an IRA, and while you know that's not a lot of money, you're happy to work part-time to supplement your income. 

Now, imagine that your child is 32 years old and trying to buy their first home. They live in a high cost-of-living area, and the $50,000 they've saved as a down payment is not enough to make a 20% down payment. They ask you to loan them $50,000 and promise to repay it over time. 

While your heart may scream for you to rescue your child, several potential problems may arise, including: 

• Your child buys a home and quickly discovers that homeownership is far more expensive than they anticipated. The money they imagined being able to pay back each month goes toward everyday living expenses instead. 
• You're only 62 and initially planned on withdrawing the Required Minimum Distribution (RMD) from your IRA at age 72, the mandatory age at which the IRS says you must withdraw money. You're counting on the power of compound interest to help grow your nest egg over the next decade. If your IRA investments earn an average return of 7% for the next 10 years, your $250,000 will balloon to $491,788. However, if you loan your child $50,000 of that money, a 7% return on $200,000 means you'll have $393,430 instead. The bottom line is this: Loaning your child $50,000 could cost you more than $98,000 in retirement. 
• You need to charge your child an interest rate equal to or more than you can earn on the funds you've invested, or else you're guaranteed to lose money. 
• Agreeing to loan an adult child money introduces a transactional aspect to the relationship. Suddenly, you're responsible for contacting them when a payment has not been made and enforcing the terms of your agreement. 

2. Time is on their side

Your child has decades longer to save, invest, and manage their money than you do. In short, they have more options. For example, they can invest the $50,000 they have put aside for a down payment into a financial vehicle paying an average annual rate of 7%. By adding $500 to their down payment savings each month, they may have a cool $104,600 available in five years. Five years may feel like forever to them, but you know how quickly those 60 months will whirl by.  

3. Hitting a brick wall is not necessarily a bad thing

If you reflect on all you've learned throughout life, you may discover that the most important lessons were instilled when your circumstances seemed dire. It may have been during a period of illness or joblessness. It could have been while you were raising young children or fighting to get ahead of inflation. Learning how to get over brick walls is how we become more resilient. 

As a parent, it's natural to want to protect your children from the tough times you experienced, but what if that robs them of the opportunity for personal growth? 

As author Idowu Koyenikan says, "There are certain life lessons that you can only learn in the struggle." Perhaps our job as parents is to be there for our children emotionally but to allow them to grow through the struggles that come their way. 

When you provide your child with immediate gratification by dipping into your personal retirement stash, you may find that you're both shortchanged.