Ask Paul: Should I give $1 million to my kids so I can claim the pension?
Dear Paul,
I feel as if I'm between a rock and a hard place. I have enough assets to prevent me from getting the pension, but not enough to create an economic engine to pay me a passive income in retirement.
I'm 53, married (28 years!) to a 51-year-old. We own our own home, have no debts and have three young adult children who live at home and are studying at uni.
Our super is $820,000 combined and we have a $330,000 share portfolio that generates $870 a month in passive income, which is automatically reinvested.
We add $1000 a month to the portfolio and $1000 a month in pre-tax contributions split between our super accounts.
We are blessed, I know, and I'm thankful for what we have, but we hope to retire in seven years, and I just don't know if we are going to get to the place where super and passive income will be enough to live on.
I'm not sure my health will let me work much longer than that. Do I distribute my assets to my kids now so I can get a pension later? I don't know what else to do.
It keeps me up at night. Am I worrying needlessly? - Michael
Well, Michael, in this highly volatile world we live in, I think we all worry a bit. The positive aspect of worrying about our money is that, unlike global issues, we all can take action. At least our money is in our control.
First up, though, let's take distributing assets to the kids at this point in time off the table. I have a simple rule about this: ensure your and your wife's financial security come first, then help the kids.
Let's take a rough look, financially, at where your assets could be in around seven years. For the sake of this exercise, I'll use a historically conservative 5%pa return for both your shares and super.
As you know, returns from super for many decades have, on average, been around 9%pa. Shares, including dividends, for centuries have averaged a bit over 10%pa.
There are few guarantees in life (except, as the old saying goes, death and taxes), but history says that by using a 5% return we can be pretty confident your assets will also cover inflation over time. In other words, we are looking at your real purchasing power.
I suspect the $1000 you add to super may be on top of employer contributions.
If that is the case, this estimate is way below what you will have: your current super balance, plus $1000 a month, is projected to be about $1.25 million and your shares (excluding the $870 per month) around $562,000. So, in seven years, a realistic projection is about $1.8 million.
Our planet could be hit by an asteroid or some dreadful plague for all I know, but at age 60, with this amount in super and shares, it would not be a silly plan to draw out, say, 5% a year, meaning you would have around $90,000 a year to spend, pretty much tax free due to super pension rules and franked dividends.
If more than that is required, pop along and see a professional adviser.
A logical strategy is to draw down on your funds and plan towards a part age pension as you approach 67. In the decades past that, you could draw down on your assets, which, incidentally, is the whole idea. Being the richest person in the graveyard doesn't make much sense.
As you build towards and start enjoying financial independence, later is the time to consider help for the kids.
Many things may happen to your life and work. You may work longer, receive an inheritance and so on.
I feel strongly that you should build your assets, not give them away to the kids now, thinking about a pension at age 67.
Please take professional advice to map out your financial future before you think seriously about this. The day will come when it makes sense to help the kids, but today, in my opinion, is not the day.
In seven years, if about $90,000 a year in today's money will allow you to live as you wish, I'd lower your money worry level. Just keep investing.
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