Money can do more for those with time left to make it work. · Lincoln Beddoe
Last year we worked with a couple, I’ll call them Mark and Lisa. Both in their late 50’s, Mark was running a consulting business and Lisa was working in healthcare. Their daughter was 35, renting in Sydney and watching the price of a potential first home run away from her savings.
Mark and Lisa were thinking about giving her $100,000 to put towards a home deposit, and wanted to know if they could afford to. This is one of the most common planning conversations we’re having at the moment.
The bank of mum and dad has become one of the biggest sources of deposit help in the country, but most of the decisions are made on emotion – love, guilt, or a bit of both.
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The numbers say you should price it up first, because this can be a seven figure family decision disguised as a nice gesture.
Mark and Lisa’s choice
The idea of a ‘living inheritance’ is simple – give the money while you’re alive, when it changes your kids’ financial trajectory, instead of when you die and they’re 60 and all the hard yards have been done.
It’s estate planning turned on its head, and the logic here is strong. $100,000 to a 35 year old trying to crack into the property market does more than $300,000 to a 60 year old who doesn’t need it. Timing beats size.
But there are two sides to the trade, and most parents only really look at one. The gift comes out of your retirement assets, and stops compounding for you the day it leaves. What Mark and Lisa hadn’t done was put numbers around both sides of the equation.
Parents 10 years from ‘freedom date’
To make it concrete, Mark and Lisa were about 10 years from their planned ‘freedom date’ – the point where work would become optional.
If instead of gifting the $100,000 they kept it invested at the long term Australian long term sharemarket return of 9.8%, it would grow to around $255,000 by the time they got there. This is the real price of the gift – not the $100,000 that leaves their account today, but the $255,000 missing from their retirement when Mark and Lisa want to stop working.
For Mark and Lisa, their plan could absorb this cost. Their investments were on track, the business sale was coming, and the $255,000 moved their freedom date by less than a year. This is the real test – not whether you can spare the cash today, but whether your future self can spare the compounding.
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