Question: I currently own my own home. I have $200,000+ in savings, and to have around $450,000 in the bank by Christmas 2022.
My question(s) are: Do I continue to watch the property market (50% of experts say it will go down, the others say up), do I borrow enough to buy an investment property now, or am I better off getting into blue chip shares, perhaps even borrowing more against my property/share value? I’m in my 50s, so any loan a bank gives me would have to reflect that. I intend to work until I am at least 65 (assuming the work is there).
Answer: Firstly, congratulations on being in a strong financial position, owning your own home and building up some sizeable savings, which now gives you some flexibility and choices.
With property and shares there are some diverse short-term views as to where they will head next.
On the one hand, they are still at relatively high valuation levels, given there are some major challenges for the local and global economies. And there are still uncertainties related to COVID-19, including when tourists and immigrants will return to Australia, which will have an effect on share and property prices.
On the other hand, governments have been stimulating the economy and interest rates are at record lows, which will inflate asset prices.
All of which is to say no one really knows where short-term prices will head and it’s very hard to time markets.
Conversely, the long-term outlook for both shares and property remain strong, although it would be hard to pick a winner between the two.
Property has some high initial costs and gives you less diversification as you normally only invest in one or two proprieties. However, buying the right property can provide with you with a high return.
Shares generally have lower costs, and you can diversify your investment across a number of different companies and sectors (financials, telcos, health etc.).
But they are not as tangible as property and, because they are traded daily, can seem to be more volatile.
You can gear (borrow) into either property and shares to magnify your gains and losses.
The tax consequences of investing in either property or shares can be significant. And when you are looking into geared investments this can provide some relief in the short term, as the borrowing costs can be offset by the income produced.
Given you are in a seemingly strong position and have stated you intend to work until age 65, and assuming you also have some super as well, one item worth considering is how much risk you wish to take on.
Taking on additional risk, which you would be doing by borrowing and investing in asset classes that could go up or down, in general should only be done if you are trying to achieve a specific goal.
I suggest clearly working out what you want to achieve with your money, by what age, and how much risk you are willing to take on before making a decision.
It is also a good idea to speak to a financial adviser who can help you identify your goals, risk tolerance and investments.
Question: My wife and I have separate super funds with AustralianSuper. We receive a part pension.
Over the last several years, but especially recently with the pandemic, the graph for several options in the fund including the balanced option goes up and down on a regular basis. In this circumstance, I take small amounts out of my fund when the balance is above my own set benchmark.
By doing that I take advantage of the volatility and turn the rises into cash rather than sit there and watch the fund value go down again thereby getting nothing from the increase.
This system has worked well for me. I would like your comment on whether you think my method is good or bad and if you could advise on the implications for the pension. Thank you Rick
Answer: I’m sure most people have heard of the saying ‘Buy Low and Sell High’. In effect you are ‘selling’ when markets go up, or when they are ‘high’.
This strategy can be effective as you are locking in the gains, so long as you do need the cash from time to time to live off. Otherwise, by taking funds out that you do not need, you will lose the opportunity to further compound your returns and miss out on future gains that the fund may make.
This strategy tends to work well when markets are volatile, as they have been over the last year or so. But when markets are flat or moving more in a straight line, then there is little benefit. And if markets keep rising, you may miss out on those increases.
You also need to consider the impact this has on your cash flow requirements and asset allocation. ‘Balanced’ funds tend to be re-balanced by the trustee to ensure they stay within set parameters. In contrast, what are you doing with a potential build up of cash?
From the age pension side of things, if you are over age pension age then funds are asset-tested in the same way regardless of where they are kept, i.e. within super or within a bank account.
From an income test perspective, your super fund balance, as well as all other financial investments, such as bank accounts, are subject to deeming.
Therefore, they are ‘deemed’ by Centrelink to earn a certain amount of interest regardless of your actual return and this is what is recorded against the income test.
Generally, taking ad hoc lump sums from your super is not counted under the income test by Centrelink so it would make no difference, as you are moving funds from one deemed asset, super, to another, a bank account.
However, if the withdrawals become ‘regular’ in nature then Centrelink may include them in the income test.
Centrelink will be able to provide you with further details on your situation.
Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services.
Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.
Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.
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