Question 1: Hi, I am 53 years old working full time earning $100,000, and my wife is 51 working part time and earning $47,000.
We live in a house valued at $2.6 million and we owe the bank $1 million with a 2.69 per cent interest rate. We have $1 million sitting with the bank in an offset account so we are paying no interest.
We also have two investment properties. The first one is valued at $1.1 million with a mortgage of $165,000, and the second is valued at $1.4 million with mortgage of $365,000.
My super balance is $355,000, and my wife’s super is $135,000. We have two children, one is 25 and working full time and the other is 18 and doing their HSC.
Looking forward, where can we use the $1 million sitting in our offset account wisely? Should we buy another investment property, or what else?
Firstly, well done on your saving and investing. You appear to have a strong balance sheet and heading towards securing yourselves a stable financial future.
Currently, you are heavily invested in property as an overall percentage of your investments, with $2.6 million in your principal home and another $2.5 million in investment properties, and you have less than $500,000 in super combined.
Many residential properties have performed very strongly recently, but the following factors need to be considered:
- With most economists predicting interest rate rises, future gains are less certain
- Property is considered a ‘growth’ asset and is higher on the risk and return spectrum than many people think
- Property is illiquid. Do you have access to other funds outside property or super in case of an emergency?
- Property is also not divisible – you have to sell a whole property to access your funds
- The main issue I see for yourself is diversification. What if property prices fall and you have 80 per cent or more of your funds in that one asset class?
- I’m not saying prices will fall, but you are adding unnecessary risk to your portfolio by having so much of it in one asset class. Property may do great going forward, and you may make large gains, but you need to recognise you are taking on a high-risk-and-high-return strategy.
I would suggest the following approach:
- Make sure you have enough funds available to cover short-term expected and unexpected expenditure. This would be in bank accounts, term deposits and online savings accounts
- Next, consider a diversified managed fund or ETF that provides investments across a wide range of asset classes, like Australian and overseas shares, bonds, infrastructure and commercial property
- Look to boost your super balances. Once you are comfortable that you have enough funds for short-term use, super is a very tax-effective vehicle to invest in, and a great place to choose a selection of diversified investments. Just bear in mind that you cannot access these funds until retirement.
Finally, to tie it all together, I suggest setting yourself some financial goals.
When do you want to retire? How much income do you want to live off in retirement? How much money will you need to generate this income and leave you a buffer? Did you want to provide financially for your children or charities and leave a large estate?
Speaking with a skilled and qualified financial planner can help you formulate and meet your goals, which is especially important in the period leading up to retirement.
Question 2: Hi Craig, I own a house, worth about $400,000 when I pass away. What happens to it? Should I sign it over to my children now?
I was thinking of gifting it to them now (signing it over). I heard or read that if I pass away, the government take it and then sort it out with the children? Is that so?
Firstly, I strongly recommend you have a will in place.
Some people don’t get around to it and some people think they don’t have enough assets to bother.
But not having a will can result in lots of administrative work and messy and costly disputes for your beneficiaries.
If you pass away without a will – this is called dying ‘intestate’ – then someone (your children or partner if you have one) will need to apply for a Grant of Letters of Administration to sort out your assets.
Your assets would then be distributed based on a set formula, which differs slightly between each state and territory.
Generally, the funds go to your partner and then your children up to certain amounts. But if you have children from a previous relationship and/or other financial dependants then this can complicate matters.
In your will, you can stipulate where you want the property proceeds to go after your death.
Or, as you have indicated, you do have the option of gifting it to your children now.
If you go down this path, be aware of the following:
- There may be transfer costs involved
- If you are in receipt of Centrelink benefits, such as the age pension, then gifting an amount above $10,000 would be treated as a deprived asset and fall under Centrelink’s asset test and be deemed under the income test
- If you want to still have use of the property yourself, then ensure you have a signed agreement in place that allows this to avoid any future disputes.
Whichever of the above options you pursue, I recommend seeking legal advice.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services
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