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By Maurie Backman / Motley Fool
July 18, 2016

Some people say that becoming a grandparent is pretty much the greatest thing ever. After all, you get the benefit of being idolized by plucky, impressionable little munchkins minus the pressure of being solely responsible for their care. But while your role as grandparent technically lets you off the hook when it comes to providing financial support for those kiddies, many folks with grandchildren wind up spending big-time on their little bundles of joy. According to an AARP study, 25% of grandparents claim to spend over $1,000 a year on their grandkids. And considering that many grandparents are also retirees, that’s a lot to spend for folks living on a fixed income.

Why grandparents spend on their grandkids

So where does all that money go? According to AARP, the most popular reason for spending money on grandkids is gift giving, from birthdays to holidays to everything in between. But of those surveyed, 53% claim their spending also relates to educational expenses, while 37% say they help pay for their grandkids’ everyday living expenses. And while paying for college and supplementing parental income are noble reasons to spend money on grandchildren, many grandparents who offer such monetary support wind up compromising their own financial standing in the process.

Calculator: How will retirement impact my living expenses?

Imagine you become a grandparent at 52, only instead of saving an extra $1,000 a year for retirement, you spend that money on your grandkids. Assuming you’re looking to retire at 67, and that your investments could’ve generated an average annual return of 5%, giving your grandkids that money means losing out on about $21,600 in retirement income.

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Now let’s visit another scenario. Imagine you’re already retired and living on a fixed income of $2,000 a month between your Social Security benefits and your retirement savings. Spending $1,000 a year on your grandkids means parting with over 4% of your income — and that’s probably not something you can afford to do.

Think before you spend

While handing over a new gadget or toy might make your beloved grandchild’s day, if you can’t afford the price tag that comes with it, don’t do it. Similarly, if you can’t afford those annual contributions to your grandkids’ college accounts, cut them out until you’re in a better position financially. If you’re a younger grandparent who’s still over a decade away from retirement, you have some time to see where your career might take you. You might, for example, earn more at 57 than at 50 or 52, so better to wait until your salary goes up to spoil those grandkids rotten.

Now if you’re already retired with no plans to work again, the idea of earning more money down the line is probably off the table. But if that’s the case, there are ways to offer financial support without sacrificing your own economic health in the process. If, for example, you’re willing to watch your grandchildren while their parents are at work, you could save those parents hundreds, if not thousands, of dollars a year in child care costs.

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Save now, treat them later

Of course, if the picture you’ve always had in your mind is that of the gift-giving, vacation-sponsoring grandparent, then you’ll need to start saving early to make this a reality. Even if you’re in your 30s and presumably decades away from grandparenthood, if you ramp up your savings now, you’ll have more options for spoiling your grandkids once they do arrive. Saving an extra $200 a month over the course of 20 years gives you an extra $79,000 to work with, even if your investments only manage to generate a relatively conservative 5% return.

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While being a generous grandparent is indeed an admirable goal, in reality, many grandparents don’t actually have the means to go all out. The good news? Chances are, your grandkids will probably love you anyway. So feel free to shower them with all the love, affection, and attention you can muster. But unless you’re in a strong place financially, keep your financial gifts to a minimum.

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