Be gracious, telling them that you’re sincerely thankful for their love and concern — but that you can’t think of anything you really need, and therefore they shouldn’t feel under any pressure (either to give or not give). If they do choose to give you a gift, accept it gracefully.
At the same time, think of some alternatives you might suggest to them. For example, many charities and religious organizations depend on year-end giving for a major part of their budgets each year — and they welcome gifts given in honor of someone. This is especially true during these times of economic hardship. Remember: You may not need anything — but countless other people do, and they depend on the work of organizations like this to help them. The Bible says, “Blessed is he who is kind to the needy” (Proverbs 14:21). Perhaps you could make a list of half a dozen or so organizations you’re interested in (with their addresses), and give the list to your relatives.
The most important thing you can do, however, is to ask God to help you be a blessing and encouragement to your children and grandchildren this Christmas. Elsewhere in your letter, you say you no longer can afford to give gifts to them — but what about the gift of your time, promising to take each grandchild to lunch (for example)? May they remember you not only for your love for them, but your love for Christ.