The Bull

Saturday 17

November, 2018 9:33 AM



Super & Retirement question

Should I sell my home, buy a cheaper one, and invest the remaining funds for retirement?

Should I sell my home, buy a cheaper one, and invest the remaining funds for retirement? Jeremy Gillman-Wells

We have 5 1/4 acres of residential land 20km south of Brisbane with an 7-year old home build by us on it. We have owned it for 10 years and our cost is around $300,000. In October last year we were offered $1.5 million by a developer who knocked on our door, which we did not accept. RP Data research showed that up to $1.8M had been paid nearby for the same type and size land.

In hindsight, should we of considered that offer more seriously, looking at it from a purely financial aspect - instead of telling him he was a thief etc. If we had sold, the money could have provided an income from investment in whatever (cold hard cash and possible capital gains). By holding our gains are on paper only, which until that period were $120,000 a year averaged out (tax free) for the ten years, nothing to complain about mind you.

All situations are different but if you consider this question based purely on good capital management – when the market recovers do we continue with this asset or sell and buy an income-producing asset of some type?So based on the best use of the capital do we buy a cheaper house, say $500,000 and invest the remaining $1 million in income producing assets or sit tight?

Our love affair with our new home is over and we don't care either way. We are aware that our future possible gains will be taxable as opposed to tax-free now. For the record we are in our early fifties but as stated above we require an answer based on pure economics. Thank you for a great web site, Don

Response:

Don - what a great question! I love this stuff because it's what financial planning is really about...Lifestyle vs Financials.

In sporting terms think NSW vs QLD State of Origin or Wallabies vs All Blacks or Carlton vs the Pies....Or perhaps in physics terms it's the financial equivalent of Newtons third law: "Every action has an equal and opposite reaction". They co-exist and you cannot have one without the other. Your query is a classic tussle that nearly every human being and investor goes through - is there really such a thing as pure economics when it comes to personal decision making?

And what about the hindsight on the $1.5M offer...love it! Such a fine line between gift horse and thief!!!

However, I digress...back to business. This scenario all goes back to goals and understanding your personal relationship with money. As you have pointed out, your love affair with the house over - you've made your lifestyle decision and so now you can assess the financial side. In my opinion the two are inextricably linked. Every lifestyle decision has a financial impact and vice versa.

Too few people really work out how to value money, what it means to them and why they choose certain ways to use it...(a sad indictment on our education system).

So, good capital management cannot happen without first being at ease with the lifestyle goals.
In October last year, you made the right decision - you stayed in your home because the love affair had not ended. If the dream had ended and you had realised that your new goals could be met by accepting the $1.5M offer (and therefore $300,000 less than the place down the street) then who cares about the actual capital realised...it's a means to an end for the new goals.

The point I'm trying to make is that too often we focus on the capital amount in dollar terms rather than focussing on what goals we are trying to achieve with that capital and the resulting cashflow.

Now we need to move forward based on the facts that:

- You are happy to lose the house you built (gave birth to) on 5.25 acres 20km south of Brisbane
- There will be no sellers remorse - the love affair is truly over
- You are happy to downsize to a place worth $500,000 - you will feel at ease in this smaller home
- The possibility that a $500,000 home will not appreciate as much in dollar terms as a $1.5M home
- That you net $1M to invest
- That producing cashflow is now more important than tax free, inaccessible wealth building in your roof (or actually under your foundations)

If these are not the case - THEN SIT TIGHT!

If you are ready to move on then let's talk good capital management.

You need to choose a strategy that is right to meet your goals and your risk appetite. Goals should be broken into short, medium and long term. In other words, aim before your fire, because too often we see overly aggressive investment decisions being made that are not in line with an investor's goals or risk profile and then, unsurprisingly, they miss the target.

Once you have the goals and timeframes, then you can consider the ownership structure to optimise cashflow, risk planning, tax planning, asset protection and estate planning.

Let's say for example that for the next two years the goal is to produce $70,000 pa. There are many ways to achieve and the path chosen depends entirely on the short, medium and longer term planning. Some options include:

1. Split the $1M into two or three term deposits at 7%+ pa. Several term deposits at different banks diversifies your risk and this achieves the income goal with virtually no capital risk. Make them all joint ownership so as to minimise the tax impact.

2. Take $130,300 from the $1M. Put it into an at call 7% pa bank account in joint names to minimise tax. Draw $5,833 per month ($70,000 pa) virtually risk free income. This will last you 2 years.

Put the remaining $869,700 into superannuation (self-managed if you want more control) split between both of you. Now this will absolutely minimise tax and assuming you are both 55 in two years and retired, you will have met preservation age and will therefore be able to access the super. Having the money in super from age 55 is generally far more tax effective than if the money is in your own names. It also gives you flexibility of access to funds and entirely tax free income after 60. It can also help with getting access to Centrelink benefits after age 65.

Invest the $869,700 according to your goals and timeframes where you maintain the control and investment risk. The examples below apply equally to inside or outside superannuation:

(i) Cash (between a couple of banks). You can still get great term deposit rates after the recent interest rate drop and cash is virtually risk free.
(ii) Quality Australian shares with fully franked and high yield dividends. Speak to your stock broker or do your research because at the moment, with prices the way they are, you can get some awesome dividends - over 10% including the franking credit.
(iii) Commercial property in a high demand area with solid tenants and a yield over 8% pa. This may be more risky than residential property, but you could try to find a place with two+ suites/workshops/retail outlets to diversify the income risk.
(iv) A combination of the above is always sensible to ensure that all your eggs are not in the one basket.

3. Take the same $130,300 as above to last you until you have access to super. Place the balance into super but instead of you maintaining the risk, buy a couple of guaranteed annuities from two different life offices such as AMP, Challenger or Colonial. This transfers the investment risk onto the life office and in return for never seeing your capital again, you receive an indexed lifetime pension. Obviously you have to be comfortable with the loss of flexibility and believe in the balance sheet/stability of the Life Office but it could still allow you to achieve the goals without worrying about the capital balance.

So structure can be used to protect the capital as well as help with timing the money to your goals. The investment decisions are related to your timing of funds required, your risk profile and your level of comfort/understanding of each type of asset.

No-one can predict what is going to happen in macro-economic terms. Sure, some will get it right some of the time but more often, it's an educated guesstimate. (Why did God create economists?...In order to make weather forecasters look good). Share markets will go up and down, house prices will fluctuate, and your capital will never be 100% completely guaranteed. The important thing is work out if your capital will be able to meet your goals through using the right structures and appropriate investments to generate your cashflow requirements.

Finally, seek good advice - find a coach that challenges you to making the right personal decision for you at the time. And then review the lifestyle and financial situation regularly...after all, the best laid plans never last forever. Exciting isn't it?!

P.S. With phrases like "good capital management", you need a job in the industry!

Disclaimer: This article is general in nature and is not intended as investment advice. Readers should always seek further advice before making any financial decisions.

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited | ABN 89 051 208 327 | AFS Licence No 232706.


» Subscribe to TheBull's free weekly newsletter to receive all the latest news and views from Australia's leading journalists. Ask us a question

PLEASE SUPPORT OUR SPONSORS, AUSTRALIA'S LEADING BROKERS:



© Copyright TheBull.com.au. All rights reserved.