Question: I’m 63 years old and work full time and will keep working until I’m 67. I own a property with a $380,000 mortgage and have $480,000 in super.
Should I use the funds to help pay down the mortgage so that when I retire I have a home fully paid off?
Investing in super or paying off debt is a very common question that people grapple with.
Firstly, as you are over the age of 60, you can only access your entire super balance if you:
- Terminate an existing employment contract, or
- Reach age 65.
As you are over your preservation age, you can withdraw a maximum of 10 per cent of your super balance every year, if you transfer your super into a transition to retirement income stream. (We covered this in detail in a previous article.)
The good news is that super withdrawals and income payments made after the age of 60 are generally all tax free.
Paying down the mortgage and becoming debt free can provide great motivation and does reduce stress for a lot of people.
Paying money into a mortgage provides a guaranteed rate of return – i.e: whatever your current home loan rate is. But as rates are at record lows, the effective rate of return is also low.
When you put money into your mortgage, it is from funds that you have already paid income tax on. But if you make additional contributions into super via salary sacrifice, you can use your pre-tax salary.
You have not provided your current income level, but for the purposes of the example below I will assume you are on a marginal tax rate, including Medicare Levy, of 34.5 per cent, which is the rate for anyone earning between $45,001 and $120,000 in 2020/21.
Example: You wish to use $1000 of pre-tax income to either pay down the mortgage faster, or save for retirement via super:
Option one: Mortgage repayment
$1000 – income tax of $345 = net repayment of $655
Option two: Salary sacrifice into super
$1000 – contributions tax of $150 = net super investment of $850.
As you can see from the above, option 2 will save you $195 in tax on every $1000 gross payment. Additionally, as mortgage rates are so low, we would expect your super fund to provider a higher return over the long term.
However, you need to be aware of the super contributions caps, so that you do not exceed them.
At retirement, you could pay out any outstanding loan via a tax-free super withdrawal, and hopefully still have a reasonable super balance to provide additional income on top of any age pension.
So, given the above, I would concentrate on building your super savings. However, it’s best to receive financial advice that considers all of your personal circumstances.
Question: My wife and I belong to a SMSF. We have six rental properties, plus the one we live in – and all the properties are paid off. We have nothing in shares, because we got “burnt” by two “trusted financial advisors”! Do you recommend that we invest a part of our funds in shares, and who do you recommend? We were with Professional Investment Services on the Gold Coast but I am not aware if they still exist, but wouldn’t deal with them, either.
Congratulations on being in such a strong financial position. Not too many people would own seven properties outright.
Diversification is a key component of investing and financial planning, so yes, I would suggest you look to diversify your portfolio to include other asset classes rather than just Australian property.
If the Australian property market was to suffer widespread significant falls, then this would have a dramatic impact on your portfolio.
Diversification works well when different asset classes go up and down at different times, lowering your overall portfolio volatility. Technically, this is called having a low, or even a negative, correlation coefficient.
Studies have shown direct property and shares have a low correlation, and including some international shares will provide additional diversification.
However, it’s not simply about purchasing random shares. For example, while perhaps a good long-term investment, owning shares in the big banks is typically more correlated with property than other investment sectors. In other words, banks tend to perform less well when property prices are falling.
Direct property investments are also not divisible. That is, you can’t just sell ‘part’ of a property. This becomes especially important when you want to start an income stream from your SMSF at retirement. You need to have available funds so you can easily start drawing down your funds and pay yourself an income in retirement.
In addition to property and shares, there is a wide selection of investment classes that could be considered, including fixed interest, cash, infrastructure, private equity, and other alternative investments.
Some of these can be accessed directly, though sometimes it’s more cost effective to invest via managed or exchange-traded funds.
I would recommend seeking advice from a financial adviser to build a tailored portfolio that is appropriately diversified and meets your long-term financial objectives and risk-return profile.
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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