FEDweek

The Dangers of Serving as the ‘Family Bank’

There’s one in every family. Not the in-law who never seems able to hold down a job or the spendthrift cousin, but rather the one family member who stands out for being financially responsible. As a federal employee or retiree, that could well be you.

And that means you are a prime candidate to serve as the “family bank.”

You have a steady federal paycheck and a lifetime annuity (currently or after you retire), unlike the large majority of private sector workers—and that annuity is inflation-protected (or at least it is under current law; stay tuned on that one).

You have, or will have, the advantage of keeping FEHB health insurance for life with the government continuing to pay, on average, 70 percent of the cost. You also have the option of continuing life, vision-dental and long-term care insurance that, while not subsidized, comes at group rates and is monitored by the government.

You have been building up a TSP account for years, decades even. Most likely you are, or were before retirement, one of the 90 percent of FERS people who personally invested—and even those who don’t get 1 percent of salary invested automatically by their agencies—and the two-thirds of CSRS people who invest. The average TSP account is around $120,000—and that average includes everyone, even those who just joined the government yesterday. Probably you have saved in other ways, as well.

In other words, you’re probably in a stable—not necessarily cushy, but stable—financial position. And such people commonly serve as the family bank for relatives who aren’t. That’s a term used in a recent report by Merrill Lynch in partnership with Age Wave, a firm that does research on aging issues.

“In today’s uncertain economy, adult children and other younger relatives—struggling with career stalls and financial difficulties—are increasingly turning to older family members for a helping hand,” it says. “At the same time, rising longevity is introducing new complications. The parents of today’s pre-retirees and retirees are living longer than any prior generation and very often require greater emotional, physical and financial support.”

“The role of the family bank is often assigned to those who saved and invested responsibly. In fact, the more financially responsible you are, the more likely other family members will consider you to be the family bank,” it says.

In a survey, it found that 62 percent of people age 50 and older are providing financial support to family members—most commonly to adult children, but also grandchildren, parents, in-laws, siblings and others.

The main motivations were a sense that it was the right thing to do and a sense of family obligation. Does that sound like you?

But there’s a risk of undercutting your own financial stability, it warns. Those serving as the family bank are “often not accounting for it in their retirement planning, nor are they talking with family members about it, which can pose a hidden risk to retirement.”

The report stressed the importance of setting ground rules and boundaries for providing such support. Before you consent to playing that role, think through how the survey’s findings describe you and the potential implications:

* Sometimes that financial help is given with the expectation that it will be repaid, sometimes not. Would you be willing to insist that the money be repaid, set terms, and enforce them if they are not met?

* Helping pay the rent/mortgage, cell phone bills and car payments were the most common known purposes, but more than a third who have provided funds don’t even know the purpose, the survey found. Would you demand to know what the money is to be used for, and get an accounting of the actual expense? Do you consider those to be acceptable uses of your financial help, especially if there’s no firm guarantee you will get it back? If not there, where would you draw the line—or would you not be able to draw a line at all?

* The most common reason for stopping was a feeling that the money was not being used wisely. Would you be able to stand up and cut off the money flow?

Remember, there are real banks—and other financial institutions—where they can borrow for college, for a car, for a home, or whatever. But you can’t borrow for your retirement.