Questions

My girlfriend managed the third-ranked Allstate agency in the Midwest in 2014 and is pursuing opening up an agency herself by July 1, 2015. She needs to have $70K in the bank at the time of signing. My parents are reaching retirement and will be investing the $70K. What is a fair way to calculate the return for my parents? My parents are approaching this as an investment and will want to see some sort of return. What should they expect? Thanks in advance!

The rate of return should compensate for level of risk your parents are taking on by making this investment. You could look at it on a scale - risk free would equal the rate of return for US Treasury Bonds (Current 30 Year rate is 2.68%) and move up from there to unsecured loans like credit cards that start at 12%+

You parents are investing into a small business (historically very few make it more than a couple years) with little recovery value (If your girlfriend can make a go of it and gives up the value your parents would get if the agency is liquidated will most likely be pennies on the dollar). This puts it in the higher risk category in my option. I would say the rate of return has to be at 8%+ to compensate for the risk they are taking on (remember they have to pay taxes on the interest they receive as well so their effective rate of return will be much lower depending on tax rate.

You may want to ask yourself if you want to tie your folks retirement on the success of your girlfriends business. Worse thing that could happen is her business fails and you have an unemployed girlfriend and parents that can't afford retirement.


Answered 5 years ago

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