What should I do with the extra $600k?
Iam almost at retirement age. According to Centrelink, there’s one year to go, although I don’t expect to be entitled to any benefits. I don’t mind continuing work but would like to perhaps cut back a little, say to four days a week.
I own my home in Perth suburbia, which I am currently subdividing to downsize. I will live in the new house and then renovate and sell the old one. This should provide me with a substantial sum of money (hopefully about $600,000). My question is, what is the best use of this money?
I own two investment properties: one in Roma, Queensland, valued at around $300,000 with a mortgage of $200,000, and a unit in Perth’s beachside suburb of Coogee, valued at around $500,000 with a mortgage of around $400,000. Current interest rates are 3.2% and 4.16% respectively. I only have a little over $100,000 in
Ireckon the starting point here is a stocktake of where you are. You own your home, and after the subdivision and sale you’ll have cash of around $600,000. Then you have equity of around $100,000 in both your investment properties and also in super, a total of $300,000.
Let’s put your house aside. It is a wonderful asset, in particular with our aged pension system, where a family home does not count as an asset towards a pension. For all Australians, getting to retirement with some sort of home ownership, be it shared with a partner, friend or a family member, is really a key life goal. It does not need to be grand or in an expensive city. But even with little else in the way of investments and money, getting to aged pension age with a home to live in means a basic but decent life. This, of course, all depends on how much you spend on lifestyle. Over the years I’ve much enjoyed emails and phone calls on talkback radio from aged pensioners, usually living in country regions, who find a home and the age pension ample for their lifestyle. Mind you, I also hear from many who live in our expensive cites, where it is a real struggle.
Anyway, that is not you. On top of your home you will have around $900,000 in equity and investment money. On top of this you have a really valuable asset, namely your ability and super, due to not earning sufficient income to trigger benefits while raising my family. I am still working with an annual income of around $53,000. I am putting an extra $800 a month towards each of my mortgages.
Should I use the proceeds from the sale of my house to pay off my investment mortgages? This would provide me with an extra $12,000 a year, which I could then use to invest in shares, and I could also add to that some of the extra $1600 a month I have been paying towards the mortgages? Or should I invest this money, or most of it, in shares and continue to benefit from investment property tax deductions until I cease work altogether?
Or I could invest in another property or even a business? I am very concerned that I do not have a big enough asset base to supply suitable income to support a reasonable lifestyle in my retirement. I am fit and
willingness to work and earn a good income of $53,000.
Think about it this way, Lee. Across a good, diversified portfolio, history shows that over the long term you should earn about 3% to 4% above inflation. So, your work income is about the same as an investment portfolio of some $1.3 million. The trick, which is your question, is how to use your work income to best effect while you keep working.
First, I’d be topping up your super. In my view, this is a no- brainer. Including the Medicare levy, you pay around 34.5c tax on each $1 above a taxable income of $45,001. If you were to take the top bit of your salary above $45,001 – let’s call that $8000 – and put it into super via salary sacrifice, you would only pay 15% tax. That is an instant return of around 20% just in tax savings. I want you to check you are in a large, low-cost, well-performing super fund and also that you are not paying for unneeded insurance. This is important not only for your existing money and top-ups, but I also want you to consider adding some of the $600,000 to your fund. This is allowed with your own money. There are limits, but with your current balance you would be able to add a substantial amount. Here it is critical you seek advice from your fund, accountant or financial adviser.
Any decent super fund will give you solid returns on your money from a well-diversified portfolio. You can, of course, draw on this once you reach your preservation age. This can be as young as 55, but no later than 60, depending on your date of birth. So here I see a really good tax break on salary sacrifice and potentially a great place to add some of your own money.
Then we turn to your investment properties. I have no idea how Roma or Coogee are going. But I suspect with a mining and regional property boom, they may be doing okay. That, of course, is the key: their rental prospects and capital growth. Your mortgage on one at 4.16% is high. You may have fixed it, but do a bit of research. I’d like to see both your mortgages close to, or even below, 3%. At this rate, I would think they would be cash flow positive. Again, to get a good level of detail, you need a chat about this. Your accountant would be a good place to start.
My overview is that you are in a really solid position, which you can build on with your job and the proceeds of the subdivision. I hope my broad guide is a good starting point, but with a large sum of cash, two investment properties and super, a personal financial plan that carefully looks at your situation and future goals in great detail would be invaluable.