Ask Paul: I'm turning 50, should I ramp up my super?
Q. I am 49, earning $120,000; my wife is 55 and works part time, earning about $30,000, 50% of which is salary sacrificed. Our $600,000 property is fully owned.
However, we have just redrawn $32,000 for a new car. This loan is fully offset and serviced from my wife's salary sacrifice.
We have combined super of $596,000 via three policies. We both contribute a voluntary 10%.
In managed funds, listed investment companies and shares we have $282,000.
I have a margin loan of $250,000 drawn to $43,000 (not making any repayments). Including the offset account we have $102,000 in savings
My focus has always been super for our retirement but I am wondering whether I should be considering purchasing an investment property, which we could convert to our owner- occupied home in, say, 10 years, after being repaid.
Or should I just ramp up the savings into super. I am employed in the financial industry so should I be considering a self-managed fund? Given my wife's age, I'd like to maximise the transition-to-retirement benefits.
A. It's a no-brainer to be paying 15% tax by salary sacrificing rather than 39%. You have given me plenty of detail, which is really helpful. But what I think is critical is the big picture.
First you talk about super for our retirement. This is a key issue for all of us. I turned 60 recently and the two fundamental issues for Vicki and I are our life plan and how we fund it. We think it will be best for us if I work around half time up to at least 65.
The idea of working 20 hours a week every week would drive me nuts so I would prefer to work fairly solidly for about eight months of the year and have four months off. This also suits Vicki as we can travel together.
With this big-picture plan we can then work backwards. We have a budget to live that life. This then leads into the assets that fund our lifestyle and also, of course, the income I generate from work. This income will greatly extend the life of our assets as our drawdown is lower while I am working. So I would really like you to have a clear life plan for retirement.
Then there's the possible purchase of an investment property, which would become your home in a decade. That causes me to think that retirement to that property when you are 59, and your wife 65, is on your mind.
So it seems to me that another 10 years of work is likely. This makes sense. Your asset base is around $1.5 million, including your house but deducting your car and margin loans. Clearly you are saving on a regular basis.
If we move to retirement assets, then that is less your home, so we are looking at $800,000. Your life expectancy is about 30 years and your wife's around 28, so close enough to three decades. The trick now is to maximise your savings capacity for the next decade.
Your wife could certainly do a TTR pension from her super. I'd have a chat to her fund about this but I am not overly excited about it. On her salary of $30,000 she pays no tax up to $18,200. She then pays 19%, plus the Medicare levy of 2%, up to $37,000.
It is worth putting her salary above $18,000 into super. At 15% tax it gives her an advantage of a few percent.
But where it is really worth making contribution is on your salary. From $80,000 the tax rate is 37% plus Medicare. So for you to be maxing out deductible contribution via salary sacrifice is a no-brainer. I'd like you to pay 15% tax, not 39%.
An SMSF is a good thought. With $596,000 you have enough to justify the fees and charges. If you were going to use the fund to gear into a good investment property, it makes sense. But don't forget these days big super funds give members excellent choice, often with incredibly low fees. I'd check this out before leaping into an SMSF.
The investment property is interesting. If the idea is that you buy something today that you'd love to live in down the track, I am supportive. But only if the property is in a growth location. If it is a quiet beach house, I am not convinced you will get decent capital growth.
You are in a great position. My advice is to grab a bottle of red and have a long chat with your wife about your life plans. Once you have them mapped out, money planning becomes a lot easier.