Crisis looming at the bank of mum and dad

It has taken this crisis for many adult children to finally realise that it doesn’t take much for outgoings to exceed income.

The coronavirus crisis has the potential to strain otherwise strong family relationships. We are only just beginning to witness some of the many legacies of COVID-19.

Last week a client called with a sobering story.

He and his wife are in their mid-70s, in reasonably good health, with $2m in capital, three grown-up children and eight grandchildren.

He told me that one of his children — who had recently lost their job as a result of COVID-19 — was pressuring him to “release his inheritance” early, to enable him to continue paying private school fees and a mortgage.

The conversation with his son, he told me, became strained when he told his son that he might not be able to help. His son then suggested he could borrow money from his father, offering an interest rate of 1.5 per cent.

He asked if I had any advice.

These are tough times for everyone, but tougher for retirees because interest rates are so low and many big companies are reducing or deferring dividends in the uncertain times.

Banks — which occupy a large percentage of retiree portfolios — are a case in point.

ANZ announced on April 30 that it will “deliberate on whether to pay an interim dividend and provide an update in August”, NAB cut its dividend to 30c per share (a drop of 64 per cent), while Westpac deferred its dividend “in the face of concerns over significant increase in bad debts”.

Commonwealth Bank will announce its full-year results in August, with dividends — if any — to be paid in September. There will be a lot of interest in this announcement. CBA has proven a gold mine for many retirees in terms of capital growth, but the income from dividends will now be uppermost in investors’ minds.

The reality is that retirees — many of whom have funded some or much of their children’s lifestyles, including mortgages and school fees — are facing increasing problems of their own.

In my client’s case, his $2m portfolio of shares and fixed-income investments, which once yielded $100,000, today yields only $35,000. That’s barely enough for a couple to live on themselves, without supporting children and grandchildren.

The so-called “Bank of Mum and Dad” — which has been available to help adult children during the good financial times — is now suffering a little, and some adult children don’t like it.

What about the next 20 years?

A retired couple in their mid-70s with anything like $2m in the bank will need to consider the prospect of eating into that capital, perhaps for the next 20 or 25 years.

Aged-care is on the horizon, which might require $1m or more for a Refundable Accommodation Deposit (RAD, previously known as a bond) and recurring monthly expenses of between $5000 and $10,000.

The chances are the age group here were not assisted by their own parents — who were invariably raised in a tougher era — but for some reason have overprotected, and in many cases indulged, their own children.

For many years the “must-have-now generation” has taken on unrealistic amounts of debt in order to fund their lifestyles, something flagged by Philip Lowe, the governor of the Reserve Bank of Australia, who has counselled people to reduce debt.

Wednesday’s warning from the CBA that Australians could face a potential 32 per cent drop in house prices as part of a prolonged economic downturn will not help borrowers’ states of mind.

It might push many borrowers into negative equity positions. The bank also identified 144,000 households that had deferred mortgage payments as a result of the crisis.

Anyone faced with a mortgage, school fees to pay, possibly a leased vehicle or two — with no salary income stream due to COVID-19, or possibly having had a severe pay-cut — is a sorry story, but one that, simply, in the case of an adult child they need to sort out.

At least there is no prospect of taking an overseas family holiday for the time being!

It has taken this crisis for many adult children to finally realise that it doesn’t take much for outgoings to exceed income.

My advice to my client was the following: don’t be pressured into bailing out your child — now is the time to think about yourselves first; certainly delay decisions until the key companies in your portfolio have reported and clarified their dividend payout policies.

At that point you will be able get a handle on your likely income stream.

Suggest gently to your children that they might need to alter their lifestyles.

Be wary of panicking and selling shares after the market has fallen sharply.

Remind your children that what you do for one of them you must do for all of them. If the situation becomes difficult, consider a mediator.

Rodney Horin is a director at Joseph Palmer & Sons, wealth managers and aged-care consultants.