INVESTING

Ask Paul: How should I invest my $300k defence payout?

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With a $300,000 compensation payout on the way, is it smarter to reduce debt, invest in super or buy an investment property?

Reader question

Hi Paul, I am 41, married with a three-year-old son.

Brooke will receive $300,000 compensation for injuries sustained while in the defence force. Should she pay it off her home loan, add it to super or invest it?

We own our home, valued at $910,000, with a $500,000 mortgage.

Our plan is to buy three investment properties over the next few years to set up our son with a home and ourselves with a passive income in our retirement years. I earn about $85,000 and my husband earns $105,000.

I will be receiving about $300,000 in 12 months' time from the Department of Veterans' Affairs for compensation for injuries sustained while in the defence force.

Should I pay it off my home loan, invest it elsewhere or add to super? - Brooke

Paul's response

This is not a bad plan, Brooke.

Obviously, I can't help banging on about spreading investment risk through diversification, but it is hard to argue that well-located property in a country where the population is growing is a bad idea. And your super balances will be growing a nice pot of diversified assets.

Adding your compensation payment to super is not a silly idea at all, but I don't see how this fits with your plans to own three properties in the next few years. I'd think topping up via salary sacrifice is a more tax-effective way to build super. Presumably, the compensation payment is your stepping stone to your first investment property.

Chat to your bank or mortgage broker to look at your borrowing capacity.

The elephant in the room is your attitude to risk. The safest thing you can do is to pay down your mortgage. This can't be a bad idea, using an offset account, you effectively earn risk free and tax free, the current interest rate of your mortgage. A very safe option.

Next you could put it in super. Super has performed very well over many decades. Historically, over the long term it should earn a higher rate than your mortgage.

But you can't touch it until you retire.

The highest risk, with potentially the highest return, is gearing into property. Gearing adds risk, it accentuates drops in value but provides high returns if your property increases in value, which it should if you do your research. I know I've thrown the ball back to you, because it is your choice.

Where I hope I have helped is in identifying risk.

Also, please don't forget you don't have to go all in. Maybe starting with one property, topping up your super by salary sacrifice and keeping a bit of the compensation money in your mortgage is a good starting point.

And you would make me very happy, as I do like to see us all managing investment risk through diversification.

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Paul Clitheroe AM is Money's founder and editorial adviser. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of Ecstra, an independent charitable foundation building financial wellbeing of Australians. He is chairman of InvestSMART Financial Services, and was chair of the Australian Government Financial Literacy Board and Financial Literacy Australia from 2004 to 2019. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. View our disclaimer.