Question 1: Shares or mortgage? We have just turned 50 and have $10,000 in shares with an average return in the mid 20 per cent (little to no dividends) and a mortgage of $480,000.
Would you advise directing any income surplus towards our share portfolio (accepting share risks), then pay down the mortgage at retirement, or pay straight off the mortgage?
That’s a very impressive return on your shares, but with growth assets like shares, the returns can of course be volatile in the short term and even turn negative for a period.
It’s great that you have identified an income surplus and want to do something positive with it. You are already ahead of most people there.
The best option for you will depend on your situation and objectives. For example:
- How long is your investment time horizon?
- How much risk are you willing to take on?
- Do you already have other investments, including super?
- When do you want to retire and on what income?
The below is an overview of your options:
Shares can provide significant long-term gains and have historically been one of the strongest asset class performers.
As you currently only have $10,000 in shares, you have an opportunity to build on this and diversify your portfolio, so you don’t just hold shares in a few companies or in companies all within the same sector.
By investing in different companies and in different sectors, you will reduce your portfolio risk.
But investing in shares always comes with some risk, and you will have to accept this if you want to build your portfolio.
That said, the longer your investment time frame, the lower your risk of achieving zero or negative returns.
With interest rates at record lows, paying down your mortgage before investing in other assets may not be the best financial strategy.
But many people find paying off the mortgage early gives them the most peace of mind, particularly if their major goal is to become debt-free.
If you choose this strategy, you are effectively achieving a guaranteed rate of return – i.e. whatever your mortgage rate is.
You made no mention of superannuation in your question, but given you are now in your 50s and have surplus income, you are the perfect candidate to start contributing more towards your retirement.
By contributing pre-tax dollars, via salary sacrifice, you could save some significant tax while also building a sizeable nest egg.
The downside is you will have to wait until you retire or turn 65, whichever is sooner, before you can access the funds.
But that is not far away.
The best option for you may involve a combination of the above and will depend on your personal circumstances.
It could be worth speaking to a financial adviser to determine your risk profile and future goals, and to model the various strategies available to you.
Question 2: I am 58 years old and have $430,000 in my super. Would I be able to take out half of that to pay off my mortgage now and still contribute to super to relieve the financial burden on my mortgage payments every month?
As you are 58, you have met your preservation age. This means you can withdraw your super but only if you are not working and have declared yourself ‘permanently retired’.
However, I assume you are either still working or not permanently retired. Therefore, the other way you can access some of your super is via a ‘transition to retirement pension’.
Even though it is called a transition to retirement pension there is no requirement for you to reduce your working hours.
You can simply move some or all of your superannuation money into what is known as a ‘transition to retirement’ income stream.
Your normal accumulation super fund can continue to accept contributions.
But you must withdraw at least 4 per cent of your account balance each year and can withdraw no more than 10 per cent.
This can either be via an annual payment or via fortnightly or monthly payments.
I would advise against using this strategy though unless you are under severe financial stress.
As you are under 60, all income stream payments from your super would be taxable (apart from any ‘tax-free’ component you may have inside super).
Also, by drawing down on super you are not letting it compound and achieve further earnings towards your retirement.
I would at least wait until you turn 60, as all income payments from the income stream are received tax-free from that age onwards.
At that point, it may be worth reviewing whether you still wish to pursue this strategy.
Your superannuation fund or financial adviser will be able to provide you with additional information and advice.
If you are under severe financial stress, you can contact your mortgage provider for assistance, or get in touch with the National Debt Hotline, a free financial counselling service, on 1800 007 007.
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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