Some Parents Use Retirement Savings for Kids’ Holiday Gifts: T. Rowe Price

Head off bad spending behavior this season by showing clients how all their financial goals are related

(Photo: AP) (Photo: AP)

Most parents spent too much on their kids during last year’s holiday season; so much so that a small but scary minority said they dipped into their retirement savings or emergency fund to cover everything, according to T. Rowe Price.

The 2015 “Parents, Kids & Money” survey, which was conducted in January but released in mid-November, found 62% of parents of 8- to 14-year-olds said they spent too much last year. Most of those managed to keep their spending confined to their current income and credit cards, even if they did go over budget, but 7% of parents tapped their retirement accounts for holiday funds, and 9% turned to their emergency fund.

The survey didn’t ask what kinds of retirement accounts those respondents were raiding, so it’s not clear if they were taking hardship withdrawals. Indeed, holiday gift giving wouldn’t qualify for a hardship withdrawal in most 401(k)s, and funds taken from an IRA would be subject to taxation and a 10% early withdrawal fee.

It’s hard to believe investors would take on those extra costs if it weren’t absolutely necessary, but Stuart Ritter, a senior financial planner at T. Rowe Price, pointed out it can be hard for consumers to see the immediate financial decisions they make in relation to their larger financial future.

“People generally look at goals in isolation, so when they’re thinking about how much they’re going to spend on the holidays, they’re not necessarily making the connection between [that decision and its] effect on things like retirement or college or even a vacation they’ll be able to take next summer,” he told ThinkAdvisor on Tuesday.

The survey found 30% of parents who weren’t actively saving for retirement and 28% who weren’t saving for their kids’ college education were saving for the holidays. Overall, 36% of parents said they saved throughout the year for the holidays.

“Very often, while we say we have one goal that’s more important than another, our money doesn’t always follow that feeling,” Ritter said. “It’s important to keep those other things in mind when people are making decisions.”

That doesn’t mean parents can’t spend money to give their kids what they want, he said; they just have to recognize that they have other goals, too, and make sure they’re “putting the right amount of money toward those.”

Ritter stressed that although most parents spent more than their self-imposed budget on the holidays, there were still a third who didn’t.

“Everyone, including us, focused on the two-thirds of people who said they overspend on the holidays, but I think it’s also important to point out that one out of three people did not agree with that statement,” he said. “One out of three people said, ‘You know what? I spent what I intended to spend.’ There is a sizeable group out there that spent what they meant to spend and that means their balance between that and the other goals they have was kept where it needed to be. It’s important for people to recognize that it can be done.”

-- Related on ThinkAdvisor: Most Gen Xers Paralyzed by Retirement Fears

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