Retiree dilemma: How much to spend on grandchildren

Nancy Schlossberg, 85, Sarasota, Fla., who has three young granddaughters, says the tradition in her family is for grandparents to pay for their grandchildren's college education and after-school activities such as dance classes and piano lessons. Her grandparents paid for her education. Her parents paid for her two children's college educations.

Schlossberg, a widow who is retired from her job as a professor of counseling psychology, is trying to figure out how she can afford to keep up the tradition. "I am working with my financial planner on how I can help pay for their college when they are ready. I don't know if I can swing the whole thing. I certainly can't afford private, elite colleges.

"But my kids are understanding, and they would never want me to spend money than I need for living expenses," says Schlossberg, author of Revitalizing Retirement.

Many grandparents who are retired or nearing retirement find themselves in a situation where their grandchildren need their help, financial and otherwise. It's a dilemma because grandparents have to balance their grandchildren's needs without jeopardizing their retirement savings.

Grandparents have been helping with grandchildren through the ages, often acting as "a safety net for their families," says Amy Goyer, AARP's family and caregiving expert and author of Things to Do Now That You're ... a Grandparent.

The most recent AARP study of 1,904 grandparents found that 96% of grandparents say they spend money on their grandchildren with 40% saying they spent more than $500 on their grandchildren in a year. Grandparents say they contribute to several major expenses: 53% to education costs; 37% to everyday living expenses; 23% to medical or dental bills.

About 11% of grandparents say they have grandchildren living with them; 16% say they provide day care services for their grandchildren while the parents are at work or school, AARP found.

Goyer says there are many different situations that lead to grandparents rearing their grandchildren or contributing significantly to their upbringing: An adult child may have financial problems or have gotten divorced and need help. In some cases, both parents who are in the military may be deployed. Or an adult child with children may have lost their job, have a health problem, be dealing with substance abuse issues, be incarcerated or have passed away, and the grandparents come to the rescue, she says.

Goyer has met hundreds of grandparents who are either raising their grandchildren or helping support them. "When you talk to these grandparents, some of them are so stressed out that they immediately start talking about the challenges they face."

They may be struggling with all the costs of clothing, food, housing, education, child care and health care, she says. And they may have a grandchild who was born with a drug or alcohol addiction, have an attachment disorder, chronic asthma or other health or emotional issues and need expensive medical and mental health help.

She says grandparents often tend to focus more on taking care of the grandchildren than themselves. If the children need money for new shoes, tutoring, counseling or extracurricular activities, grandparents may skip having a prescription refilled or a doctor's appointment, Goyer says.

But even grandparents who are overwhelmed by the challenges often point out that their grandchildren are the "light of their lives," she says. They say things like, "My grandchildren are the biggest blessing in my life. I don't know what I'd do without them. They give me a reason to get out of bed every day."

Certified financial planner Brian Power, one of the owners of Gateway Advisory in Westfield, N.J., has multiple clients with adult children who have run into financial difficulties and moved back in with their parents, bringing the grandchildren with them.

In most cases, it's a very stressful situation, because the grandparents are withdrawing money from their retirement accounts faster than they had planned, he says. "Sometimes it puts a complete kibosh on their overall financial plan and their retirement. It usually delays the clients' retirement, sometimes indefinitely."

People either can't retire when they want, or they actually go back to work, Power says. He has one client, a 70-year-old attorney, who is continuing to work to support his divorced daughter and her two children. All three live with him and his wife.

"The bottom line is the grandfather is doing what he has to do. He'd be retired if he could be, but he doesn't feel like he can because of the outflow of money to his daughter and the grandkids."

New York-based attorney Ann-Margaret Carrozza says a trend she's seeing is adult children are naming their parents as the guardians of their children in their wills. And when that's the case, it may need to be factored into retirement plans because "kids are incredibly expensive, and it will take a toll on the grandparents financially," she says.

Retirees need to be realistic about how much they can help financially, she says. "A big issue that I see is grandparents being asked to co-sign on student loans. This is usually a very big mistake," Carrozza says. "Given that there are fewer jobs requiring college degrees than there are newly minted college graduates, chances of a debt-laden student falling behind on payments is higher than ever. If that happens, the grandparents will be on the hook for the loan."

Anything can happen, she says. "I have a client whose grandson died, and she is still responsible for his student loans because she co-signed the loan. My advice to clients being asked to co-sign is to say no," she says. "Instead, come up with an amount that you can comfortably part with and offer to cover your grandchild's books or other more manageable expenses."

A recent Fidelity Investments survey found that most (72%) of grandparents think it's important for them to help pay for their grandchildren's college education, but only about a third (37%) say they're currently saving for their grandkids' college expenses.

Fidelity's Keith Bernhardt says, "Helping pay for college is an amazing gift from a grandparent, but when making those plans, it's important that they also keep their own long-term financial needs in mind, making sure to provide for their own future first."