2

Good morning, The question is whether we should borrow money on a secure line of credit (already approved), to help a child to buy a home, and then to pay the loan back over time, as quickly as possible. Or, to draw the money out of our investments with a financial institution, managed by our financial planner, and try to rebuild the capital drawn.

We are retired, own our home, and are receiving pensions from the Ontario Teachers Pension Plan.

R.F.
  • 21
  • 1
  • What does your financial planner suggest? Do your investments have any penalties on withdrawing? What's the interest rate of the line of credit? – BobbyScon Nov 28 '16 at 14:08
  • I assume your pension is a defined benefit plan? If so, that might add incentive to not draw from your nest egg, as you have a strong degree of certainty over your monthly income [so lower risk of not being able to pay off debt taken on]. – Grade 'Eh' Bacon Nov 28 '16 at 17:05

1 Answers1

1

No one can really answer this for you. It is a matter of personal preference and the details of your situation. There are some really smart people on here, when placed in your exact situation, would do completely different things. Personal finance is overall, personal.

If it was me, I'd never borrow money in retirement. If I had the cash, I'd use it to help fund the purchase. If I didn't, I simply wouldn't. For me wealth retention (in your case) is surprisingly more about behavior than math (even though I am a math guy). You are simply creating a great deal of risk at a season in your life with a diminished ability to recover from negative events. In my opinion you are inviting "tales of woe" to be part of your future if you borrow.

Others would disagree with me. They would point to the math and show how you would be much better off on borrowing instead of pulling out of investments provided a sufficient return on your nest egg. They may even have a case as you might have to pay taxes on money pulled out magnifying the difference in net income on borrowing versus pulling out in a lump sum. Here in the US, the money you pulled out would be taxed at the highest marginal rate. To help with a down payment of 50K, you might have to pull out 66,500 to pay the taxes and have enough for the down payment.

The third option is to not help with a down payment or to help them in a different way. Perhaps giving them a few hundred per month for two years to help with their mortgage payment. Maybe watch their kids some to reduce day care costs or help with home improvements so they can buy a lower price home. Those are all viable options. Perhaps the child is not ready to buy a home.

Having said all that it really depends on your situation. Say your sitting on 5 million in investments, your pensions is sufficient to have some disposable income, and they are asking for a relatively small amount. Then pull the money out and don't be concerned. You nest egg will quickly recover the money.

Pete B.
  • 76,481
  • 16
  • 167
  • 236
  • 1
    One specific factor in this case is that I believe the Ontario Teachers' Pension Plan is a defined benefit pension plan, not a defined contribution plan [at least for anyone already retired]. That means the OP has very high degree of certainty over future income, but may not have immediate access to cash. As you say that is one of the many personal elements of a particular situation to consider. Otherwise, I strongly agree with you that taking on debt after retirement is risky, not least because it can lead you to turn a blind eye to the true cost of what you're spending. – Grade 'Eh' Bacon Nov 28 '16 at 17:04