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4 key ways to prevent your grown-up children derailing your retirement savings

The type of financial assistance given can take various forms, such as money towards a house deposit or a loan for a car or ongoing support towards rent or bills. While it’s natural to want to help, though, the hard truth is that it’s important not to put your child’s finances before your own retirement savings. Otherwise, in the long run, no one wins. We look at four key ways to help retain a sensible outlook.

Make sure you understand your own financial situation and your retirement goals

Before you leap in and promise to help your son or daughter, make sure you’re clear about your monthly budget. What are your regular commitments and your personal retirement goals? Will you still be able to lead the lifestyle you’re envisaging if you’re supporting your children financially too? As a general rule, you need to be able to replace at least 70% of your pre-retirement income once you stop work. You may also have plans to travel more or have a particular home renovation project in mind. It’s important that you remember to factor in any potential health costs as well.

Sit down with your child and have a frank discussion

If you’re open and honest about your own commitments and the level of your support, this actually sets a good example to your children at a time when they’ll just be learning to manage their own finances. It also gives you an opportunity to set boundaries, clarify expectations and fix timescales. Be specific: is the money to help with a student loan, rent, a mobile phone contract or food bills? The concept of an ‘independence fund’ can sometimes work well – a one-off payment to help an adult child as they enter the ‘grown-up world’.

An external perspective

Sometimes, it helps to involve a third party, such as a professional financial adviser who can offer some valuable objectivity in what can be an emotionally-charged situation. If you all sit down and review your financial plan together, it makes it easier for everyone concerned to see the impact giving a loan to your children would have on your own finances. Bear in mind that if you did overstretch yourself, you could end up having to turn to your offspring for financial support and the last thing anyone wants is to become a burden in later life.

Put it in writing

If you do decide to give your children some money, it does no harm to make the arrangement formal. This means they will take the loan seriously and it gives both you and them something to refer back to in the future. It also sets expectations in terms of any repayments and timeframes. Make sure you review the document regularly and that it is still appropriate. For example, circumstances will change – your child may get a promotion or you may have incurred some medical expenses.

The bottom line is you need to look after your own finances now to be able to look after theirs in the long run.

The Medicis: the banking family at the heart of the renaissance

The Middle Ages are not generally associated with multinational banking. However, during the 15th century, Florence’s Medici family built a banking empire that dominated Europe for a century. By the time their dynasty began to crumble, they had opened branches in Milan, Venice, Rome, London, Geneva, Lyon, Avignon, Barcelona and Bruges.

The Medicis were relentless investors in renaissance art and spawned four popes and two French queens – quite the legacy. What’s more, they developed several financial innovations that we still use today. One thing’s for certain – the world would be a very different place if it wasn’t for this family.

In 1397, Giovanni de’ Medici opened the first branch of the Medici banks – the first of many that thoroughly changed the course of European history. However, the thing that differed from conventional modern banking in their operations was that most of their lending was to royalty, to finance campaigns or to ostentatious princes.

In the financial world, the Medicis invented the ‘letter of credit’, the forerunner to the modern cheque, as well as the holding company model. Without these, modern banking would look very different.

Avoiding usury

Medieval Europe was a rigidly Christian society where the Church was a central tenet of daily life. The Catholic Church prohibited usury, the charge for the use of money, until the 16th Century. Unfortunately for medieval banks, this included charging interest rates on loans.

The Medici family came up with several ingenious ways of avoiding the Church’s definition of usury while still making a profit on the money they loaned. One way they did this was by offering loans to trading partners in return for access to below the market rate prices. For instance, they would lend to English wool merchants in return for being able to buy wool cheaper than their trading competitors.

Another way was by using foreign currency: the bank would lend or accept a bill of exchange in one currency and collect its debt in another, building a hidden commission into the transfer.

Even the Catholic Church itself paid interest to the Medici family. However, they avoided blatant usury by selling pricey goods at low prices to the Medicis – this was a handy way of committing what was then defined as a mortal sin without having to condemn themselves directly.

The birth of secular society

The Medici family rose to power in an age where the Church exerted great control over all tenets of society. However, they extensively funded paintings of mythological scenes and classical beauty, signalling a change from the prior dominance of religious imagery.

The Medicis commissioned art and buildings by the likes of Botticelli, Donatello and Brunelleschi; works which very much define the city today. Florence would not be such a stand-out destination if not for the 400 years they were at the helm of Florentine power.

Without the Medicis’ relentless funding, it is likely that Renaissance thought would not have flourished as it did in this period. The Medicis had a firm belief in public art, public space and public works. Before the Medicis, projects such as these usually served only a religious purpose. At this point in history, states’ priorities were consigned to maintaining their grip on power.

Despite the shady context of some of their deals, the Medicis were revolutionary in their pursuit of the good of the public. They were a financial family that thoroughly changed the course of world history.

Jillian Thomas DipPFS
  • Partner
  • Head of Wealth Management

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