Ask Paul: Can we afford to retire and keep helping our kids?

They never expected to be nearing retirement with a mortgage still hanging over their heads and adult children who may need ongoing financial support. Paul explains how to balance super, debt and family responsibilities in the crucial years before retirement.

Reader question

My partner and I are approaching retirement age, but we're not in the position we expected to be in at this stage of our lives.

We still have a sizable mortgage and two children who may need financial support well into adulthood.

We've spoken to several financial advisers, but often feel the conversation quickly turns towards investment products and managing investments, when what we really need is someone to help us step back and look at the bigger picture.

How should we think about the next 10 years of our working lives?

Should we be prioritising paying down the mortgage, building super, investing 
or simply creating more financial flexibility?

And how do we factor in the possibility that we may need to continue supporting our children financially?

We're not necessarily looking for an investment strategy or a product recommendation.

We'd really value some practical, independent guidance on the options and trade-offs we should be considering while we still have time to make a difference.

What would you suggest we do now? - Martin

Paul Clitheroe's response

Sadly, I hear this a lot, Martin. Too many advisers quickly turn to their best source of revenue and an area they are comfortable with... financial products.

Quite frankly, as you know, investment products are a secondary issue. You need to get your strategy right. I much value the role of advisers, but the bit I point to is the advice, not product sales.

The obvious strategy is for you to create wealth. I have stated the very obvious, so let's break this down.

First up, while I am sure you have done this, your budget. Wealth creation comes from spending less than you earn. Once you know your surplus income, then you can build a strategy.

Roughly speaking, it goes a bit like this.

If your tax rate is above 15% on the top part of your income, salary sacrifice via your employer into super is your best money friend. On a taxable income above $45,000 you pay 32% including the Medicare levy.

So with a $1 earned, you take home 68 cents and it can go into your, at a guess, 6.5% mortgage. Or 85 cents can go into super, with a low-cost balanced fund, these have averaged about 7%pa to 8%pa over many decades.

Strategically, super makes more sense. It makes even more sense if either of your salaries is more than $135,000 where tax plus Medicare 
levy jumps to 39%.

After super, it is hard to go past paying down your mortgage, via an offset account to give you access to funds if needed. If your mortgage is about 
6.5%, each dollar into your mortgage is effectively earning you that 6.5% risk free and tax free.

In your situation, I don't think you need an adviser. I hear your problem; you must create wealth. You do this by managing spending and making a determined effort to save the surplus you have.

If you are higher taxpayers, I suspect the answer is salary sacrifice into a large, very low-cost super fund.

Otherwise, with any excess above the maximum of the $32,500pa, you can both put into super. Then I find it hard to go past an offset account against your mortgage. Where else would you earn the interest rate of your mortgage risk free and tax free?

At times I need to be quite general in my answers, but in your situation the most certain outcome will come from saving as hard as you can and directing your savings to super or your mortgage.

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