James Wrigley, Senior Financial Advisor at First Financial, answers money questions every Wednesday.
Hello James,
My wife and I are about to retire and have about $1 million in super.
We also own two investment properties worth about $600,000 each, with a net yield of about 6 percent, with no debt. We own the house we live in.
Should we sell one of the investment properties and put it into super on non-concessional terms?
Thank you,
John.
$106,000 is a good retirement income, but it’s not the $120,000 that many couples spend, James Wrigley tells John.
Hello, John,
With the little information you have given us it is almost impossible to draw a conclusion about whether you should sell a property to top up your super.
The properties he owns provide exceptionally high rental income. Six percent net income (that is, after all expenses associated with owning the property) is almost unheard of for residential investment properties, but somewhat achievable if they are commercial properties.
When it comes to retirement, your access to cash and spending money becomes the top priority, let alone the value of the assets you own. Start by analyzing what income you need to live out the retirement you aspire to, and then analyze whether your current asset mix can support it.
If we start with your investment properties 2 x $600k = $1.2 million with a net income of 6%, it means you are earning approximately $72,000 a year in rental income. Assuming you jointly own the properties, this income is split between you and your wife, making it $36,000 each. Then after taxes, it’s $33,000 each. Therefore, your initial combined retirement income is $66,000 ($33,000 x 2).
Now let’s look at your super. With $1 million in super combined, if you started drawing pensions from this balance on retirement (after age 60), you would need to withdraw a minimum of 4% or $40,000 between you; The pension you get from super is tax-free. Add this to rental income and you have a retirement income of $106,000.
By only collecting the minimum pension, your super balance will last a long time. However, the vast majority of people draw on their retirement savings to fund their retirement, with minimum pension requirements starting at 4% but rising to 5%, 6%, 7% and more as you age. This increasing minimum pension requirement will mean that your super balance will eventually start to trend downwards.
Then we can get back to earning the retirement income you want. This figure is unique to you, but if you were to look at what other people with similar asset positions as you spend in retirement, that figure would be around $120,000 a year. The $106,000 we identified above is a good retirement income, but it’s not the $120,000 that many couples spend.
Looking at your situation, the main driver of selling a property to top up your super would be driven by tax rather than access to capital (you have plenty of liquid capital in super that you can draw on over many years to supplement your expenses). You’re not paying much income tax on rental income, but you are paying some. If this money were invested through your super fund, in pension mode, you would not pay that tax.
The other big consideration here is the capital gains tax. If you were to sell a property, you would certainly have to pay some capital gains tax. If you sold after you retired, at the beginning of a financial year, so you hadn’t yet earned much rental income, and used personal concessional contributions, you could greatly reduce (if not eliminate) capital gains tax. Then, that money invested through your super fund, again in pension mode, would be exempt from capital gains tax in the future. A small capital gains tax increase now could save you and/or your estate a significant amount.
Find yourself a financial advisor who you can sit down with and discuss some scenarios in detail. Only then can you determine what will be best.
All the best,
Jaime.
Send your questions to James at thewealthbuilder@dailymail.com.au
James Wrigley is a representative of First Financial PTY LTD ABN 15 167 177 817 AFSL 481098
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