Being debt-free when you retire should be a major goal. However, there are diverse ways to get there and often advice from well-meaning friends can be misleading.
I received an email this week from Lucy, 59, who earned $100,000 a year and had $429,000 in super. Lucy still owed $169,000 on her home, with an interest-rate of 2.73 per cent and monthly payments of $839. It would take 22 years to pay the loan off, but she wanted advice on improving her situation.
Her superannuation fund advisor recommended she maximise her contributions. Of which a work colleague said would be a bad idea - "if the market crashes, you could lose heavily". So she asked for my advice.
For somebody over 50, making contributions to superannuation is a much better option than speeding up loan repayments.
This is because super contributions lose just 15 per cent contributions tax, whereas the after-tax dollars required to pay your home loan lose tax at your marginal rate - 34.5 per cent in Lucy's case.
A good superannuation fund should be returning at least 8 per cent per annum, whereas the interest on your home loan should be no more than 3 per cent.
Thanks to the indexation changes that took effect from July 1, Lucy can now make a concessional contribution of the difference between $27,500 a year and the employer contribution of $10,000. That $17,500 contribution would be tax-deductible to her.
After the $2625 contributions tax she would have $14,875 working for her in the low-taxed superannuation system, where it would continue to grow. In contrast, if she chose to invest $14,875 to reduce a home loan, the cost to her gross pay would be $22,710.
And there's more - on Lucy's salary, a tax deduction of $14,875 should give rise to a tax refund of $5132, which could also be contributed to her superannuation fund, as an after-tax contribution.
The combination of the concessional contribution and the after-tax contribution would mean an extra $20,000 a year would be going to super. If the fund earned 8 per cent per annum, that's an additional $146,000 in her super in six years.
If her salary grew at 2 per cent per annum, and her employer fund achieved 8 per cent per annum, she would have $751,000 in her employer fund at age 65, giving her a total of $897,000 in super.
At some stage, due to market movement, it's likely markets will tumbled and her superannuation balance will fall. But just as certainly, it will bounce back. Lucy can expect at least 30 years of living ahead of her, and should take a long-term view.
When she is 65, her debt should be $134,000 if she keeps up the present repayments. The extra contributions she's been making could cover paying this off, but there would be no requirement to pay out her loan. Depending on interest rates, Lucy might still be better off keeping more money in super.
The interest payable on $134,000 at 3.5 per cent would be just under $5000 a year, so she could simply take $10,000 a year from her superannuation fund to make the repayments on the loan; allowing Lucy to keep at least $850,000 in super.
If her super were earning 8 per cent per annum, the difference between the two rates would give her an extra 4.5 per cent on the loan balance of $134,000 - a nice $6000-a-year bonus. A great position to retire in.
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Noel answers your money questions
I am 64 and live on a defined benefit pension on which I pay the normal marginal tax rates. My taxable income is around $70,000 a year.
I have an accumulation account in super which I have no requirement to access. Can I partially convert to a pension account, withdraw $25,000 each year and then put that into my accumulation account and claim a tax deduction for that contribution?
If you are retired, and over your preservation age, there is no need to convert any of your superannuation to pension mode in order to make a withdrawal.
If you did decide to start any other pension you should check your transfer balance cap and ask your defined benefit pension provider as to the taxation status of your pension. In many cases there are offsets available.
Given your taxable income, it would be better to maximise the amount of money you keep in accumulation mode because the tax is 15 per cent flat and there is no requirement to make annual withdrawals. Until you reach 67 you can contribute up to $27,500 a year as a tax deduction.
I am retired and have bought an apartment. To meet the cost of the apartment, I need to use all of the proceeds from the sale of my family home. This will leave me with a shortfall of approximately $460,000 to complete the purchase.
I had intended to withdraw $460,000 from my superannuation but now wonder if a better strategy would be to keep that money in superannuation, and take out a loan for the same amount.
By withdrawing $460,000 from superannuation I would potentially lose growth of around 4 per cent net of fees which has been my funds returns to date, whereas I should be able to obtain a loan for around 2 per cent.
Could you please advise if the above strategy is sound or whether significant risks would present?
Provided you can find a lender who will give you a loan, I don't see any major drawbacks in your proposed strategy. I don't foresee bank interest rates leaping in the foreseeable future, and a good superannuation fund should be able to do 4 per cent per annum in a conservative asset allocation. Just make sure you keep adequate cash available for the next three to four years spending.
I am really confused about how much a pensioner can earn before they start to lose some pension. You have written that a single pensioner can earn $180 a fortnight and still be eligible for the full pension of $952.70 a fortnight and can earn $150 a week from personal exertion or from business. Does this mean I could earn $480 a fortnight?
Just be aware that the income from your investments is deemed, which means you could have $255,000 of deemed investments as a single pensioner which would be deemed to be earning $180 a fortnight. If this was your only income plus the $150 a week mentioned before, you could earn $480 a fortnight with no effect on your pension.
For many reasons we are unable to use a family member or close friend as our Estate Executor. Recently we thought about utilizing our Financial Advisor with whom we have developed a trusting relationship over the past 10 years. Is this advisable ?
Elder lawyer Brian Herd points out that professional advisors should normally be the last resort as an executor - generally they are loath to do it, and may well be in the same age bracket as the will maker. This means that they may not be around when the will maker dies.
Furthermore, if a professional person is appointed, they will usually charge the estate to be the executor, which may not sit well with the beneficiaries of the estate.
If you do appoint only one executor, and they are not around when you die and have no alternative executor appointed, an application to the court would be required to appoint an administrator.
If that happens family members may well be appointed which defeats the whole purpose of avoiding appointing them in the first place.
An alternative is a trustee company, because they have eternal life, but they do charge for their services. Also, keep in mind that the fact that somebody is appointed as an executor does not make it mandatory for them to accept the position.
Furthermore, a conflict of interest could arise if the executor is, or was, an advisor to yourself.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org