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Special to the Financial Independence Hub
Your son or daughter just asked you for a short-term loan to help them start a business. If everything goes well, they will pay you back with interest in a few years. But what if they never pay you back? How much will it impact your ability to enjoy your retirement?
RediNest is a personal financial planning application that you can use to get answers to your retirement planning questions.
How RediNest can help
John and Joan plan to retire in 10 years. Although they do not have a pension plan, they have $300,000 in RRSP and $100,000 in TFSA investments. With no mortgage, they are able to contribute the maximum each year to both RRSP and TFSA.
Using RediNest they calculated their Retirement Potential™ at $73,900 of after-tax retirement income, slightly more than the Canadian average* of $69,000.
Their son has asked them to invest $100,000 in his business. He has prepared a business plan, and expects to repay the full amount over five years. John and Joan want to fully understand the risks before loaning their son the money, so they modified their RediNest plan and reduced their TFSA balance to zero.
Assuming a worst case scenario where they never get their money back, John and Joan re-calculated their Retirement Potential to be $67,800, a reduction of over $6,000 / year for life! A significant amount when you consider it is after-tax and fully indexed for inflation. If they never get their money back, John and Joan want to understand the options available to them to restore their Retirement Potential, as they do not want to have less disposable income in retirement.
Using RediNest, John and Joan discovered they would have to increase their monthly savings by over $900/month for the next 10 years: something they feel they cannot do.
Deferring retirement by a year
Next, they considered adjusting their retirement age from 65 to 66. Deferring their retirement one year means an additional year of savings and one less year of spending is needed to give them the income they want. Not ideal, but they would consider it.
Finally, they modified their estimated return on investment and found they would have to earn an additional 1% every year from now until life expectancy to be able to enjoy the standard of living they had planned on. This is unlikely, given their investment allocation and risk tolerance.
After weighing all the facts, John and Joan decided they would loan their son the money, and should he be unable to repay the full amount, they would delay their planned retirement date by as many months as needed.
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Do you know what your Retirement Potential™ is and the options available to you? Get your free report at RediNest.com.
*Canadian average represents the average Retirement Potential of financial analysis prepared by financial advisors in the past 12 months using RazorPlan† financial planning software, excluding people with corporate assets.
†RazorPlan software is the analytical engine used by RediNest.com to calculate Retirement Potential. Total sample exceeds 10,000 professionally prepared analyses.
Dave Faulkner, CLU, CFP is a Financial Planner in Alberta and CEO of Razor Logic Systems Inc., developer of RazorPlan financial planning software. This article originally appeared on the RazorPlan website and is republished on the Hub with permission.
Of course IF they should pay you back you will have to be careful that they don’t pay more than market rate interest to avoid the new “split income” rules!