How to know when you can afford to retire
Personal finance expert George Cochrane answers your questions.
Can I afford to retire? I am 61, a healthy single lady with no dependants. My gross salary is $107,000, working full-time in government service, increasing every year at 2.5 per cent. I have five home units in NSW, Victoria and SA, collectively valued at $2.2 million with mortgages of $1.1 million. I currently have $657,000 in my super with an industry fund and about $124,000 in an offset account. I am salary sacrificing the maximum amount of $24,000 to my super, inclusive of employer’s contribution. All my loans are with the ANZ bank, which charges me interest at 4.6 per cent. They are all negatively geared, although the tax deductions are reducing over the years. I plan to do the following: sell one property before the end of June 2018 at a loss, so hopefully that should reduce my taxable income, and work four days a week from now to mid-July 2018, then retire and sell two more properties. I am concerned that I may not have enough for my retirement and for paying the huge accommodation bond to enter a nursing home. I am currently healthy and can continue working to 65, if required, though I would prefer to retire as soon as possible. A.O.
Don’t forget the maximum concessional contribution in 2017-18 is $25,000, including employer contributions.
If all five units are investments, and if they bring in a 3.5 per cent rental yield after outgoings, then total rent of $77,000 is well above interest charged of about $45,000 a year. You obviously won’t be able to pay off principal and interest over the next one to four years. I would really need to know what CGT liability you face and how much you need to live on in retirement to judge whether you can retire now.
But if you walk away with about $1 million after eventually selling your investment properties, and also have close to $700,000 in super, you will have considerably more than most people.
You are quite right to fear large entry costs into aged care residences. Such costs have risen sharply in recent years and nothing indicates they will cease doing so over the next 20 years when you are likely to need one.
Work until 65, you can’t go wrong!
I am 57 and imagine that I’ll be working until I’m 70. I am single, have no dependants and have $181,000 in super. I started a new part-time lecturing contract with a university this year and am contracted until December 2018, earning $53,000 plus 14 per cent super. I have been lecturing at the university on a casual basis for the last three years. This contract should be converted into a permanent position in December 2018. My other part-time job, for 15 years, is as an English as a second language teacher at a college – about $50,000 plus 9.5 per cent super. I own an investment property, a one-bedroom unit in Dulwich Hill, in inner-west Sydney, value $600,000 – mortgage $120,000 interest only. Currently rented at $460 per week, I lived in this apartment between purchase in 2003 until 2005 and then again between 2009 and 2011, which means if I sold it this year I would be exempt from capital gains tax, as it falls within the six-year limitation period. I live in a one-bedroom unit in the beachside suburb of Maroubra, value $700,000 with a mortgage of $440,000. I have personal savings of $35,000. Would it make more sense to sell the investment unit now, avoid capital gains tax, pay off the Maroubra unit and put what’s left over (if any) into my super? If I do the above it will leave me mortgage-free and I could pour all my future savings into my super. Given that the Sydney property market is still rising (despite talk of bubbles) and interest rates are at record lows, does it make more sense to keep the investment unit as it will continue to appreciate and provide me with a steady flow of income? If I keep the investment unit should I convert to principal and interest (while rates are low) and pay it off ASAP, or should I concentrate on paying off the residential property? M.D.
The six-year CGT-free limit is only available if you claim no other main residence. I presume your Maroubra unit is your preferred CGT-free home, given that a beachside unit may have accumulated more capital gain over the last few years, although the building of the inner west light rail has given Dulwich Hill a boost. You need not decide until you sell one.
I hate to sell a property unless it needs expensive repairs, or you really need the money, which you don’t, or you have a short time horizon, which you do. If you keep both properties, your obvious focus should be on paying off your non-deductible home mortgage, and this will cost more than $49,000 a year for 13 years if rates average 7 per cent. This would take over half of your after-tax income, which I guesstimate at about $83,000 a year. It seems a very high price to pay and one can conclude you are unlikely to keep both properties and be able to retire debt-free with a healthy amount in super, which should be your end goal.
I expect a burst of inflation at some time in the near future as a result of all the debt built up around the world, so the textbooks would say asset prices should rise over that timeframe. However, property is already highly priced in relation to incomes and we learned in the 1970s that central banks are prepared to push rates up well into double digits in such a scenario. The lesson was that, despite high inflation, property and share prices can fall dramatically.
Given your age, and the knowledge that old age and ill health often go hand in hand, I agree you should consider selling one property. Mathematically, you would be better off selling your beachside unit but I assume this is where you plan to retire.
I have an investment property, acquired in 2010, and a BT Portfolio Wrap account, acquired in 2005. I am planning to retire at the end of next year and to move onto a defined benefits indexed pension. I do not intend to work, so I would rely on this. I was wondering what happens if I sell both assets after I retire: 1. Does capital gains tax liability become part of my (then) normal tax bill, i.e. if I am not earning a wage then I have a tax free threshold and so does that reduce my CGT liability? 2. Does capital gains tax apply to the BT Wrap account – on which I’ve had tax liabilities each year calculated through my tax return or are those taxes just a cost for having the account regardless of not realising any income from it in that time? J.J.
Whichever asset you sell, you will (or more likely, your accountant will), add half of the profit to your assessable income that tax year, so it may be worthwhile not selling them both in the same year. The tax you have paid over the years would be on the annual income earned by both investments even if, in the case of your wrap account, it may have been reinvested.
If your superannuation pension is a federal government pension, and the employer’s portion is paid out of consolidated revenue, then this component of the pension is said to be “unfunded” and is taxable, although your tax is offset, i.e. reduced, by an amount equal to 10 per cent of this component. If it is a large taxable pension, then by adding any capital gain (from selling an asset), the latter will be pushed into a high tax bracket. In such a case, you may be able to save on tax by not starting your pension, although as a rule of thumb, the sooner you start a lifetime pension, the better.
If instead you are in a state government defined benefit pension, then the pension is probably untaxed.
In either case, you shouldn’t sell assets just because you are retiring. Hopefully, you will live some decades in retirement, in which case you will benefit from investments that grow over time.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00.