Ask Paul: What should I do with my inheritance?
Q. I am 46, separated with one dependent child. I have been with the same employer for 25 years and have defined benefits super.
I have multiple investment properties with about a 45% loan-to-value ratio (LVR). I have no non-deductible debt.
Apart from a couple of businesses along the way I have always chosen property as it seemed to be the simplest and safest investment/wealth-building path.
I will shortly receive an inheritance of about $350,000. I would now like to continue my wealth-building outside property.
I don't want to be constantly share trading and trying to outdo experts in this field. I would describe my investing style as "passive".
I would like to hold some of my inheritance in an offset account (so I can live a little for a change) and invest the rest.
Your thoughts please, Paul. - Rob
A. Hi Rob. Yes, it is time to rest up a bit. You have done the heavy lifting and thanks to the $350,000 inheritance you most certainly can start to live a little. In fact, I hope quite a lot.
Even without the inheritance, your finances are in good shape. The defined benefit fund is a real bonus. Most readers - and I fit into this category - will have an accumulation fund. These are very simple.
Whatever we put into super is what we have. Investment performance and fees are critical. Accumulation fund members also have to plan how long the money will last when we stop work. This is never easy, in particular with very low interest rates and investment markets bumping up and down.
The older defined benefit funds, generally government, are just rippers. When they were established, it never occurred to policymakers that many people would live well into their 80s and beyond. So a 60-year-old today can often retire on close to 100% of their salary, linked to inflation and government guaranteed. How good is that!
You are younger so your defined benefit fund may end up being a multiple of your final salary and be paid as a lump sum, which puts you in the same situation as an accumulation fund member at retirement. But either way I suspect that if you work to 60 or beyond, your super will give you a great start in terms of the income you need.
But I am very pleased you have not relied solely on this and built a property portfolio outside super. I do agree that property is a simple asset. If you buy well in a growth area, and our population continues to grow, as it will, in the long run property will do just fine. You mention you have several properties with an LVR of around 45%. With interest rates at historic lows, I have no doubt that with this quite low percentage of debt your properties are income positive - that is, the rent you receive covers all expenses, meets mortgage payments and leaves you with some surplus income.
This is pretty important. The cost of your loans, by which I mean the interest rate, is the key driver as to how you invest the inheritance. Basic variable interest rates are pretty close to 4%, so check you are on a competitive rate. If I assume 4.5%, then if you put the inheritance into an offset account, in effect you are earning 4.5% on it. This is pretty good when term deposits are 2.5% but even at 4.5% you are just standing still after tax and inflation.
So would you earn more than 4.5% on a share portfolio? History says you will. Returns, including the dividends, over long periods are on average in the region of 8%-9%. This usually consists of around 4% income paid as dividends - often fully franked, meaning they come with a 30% tax credit - and 4%-5% annual growth.
As a passive investor - I am the same, incidentally - I'd suggest you look at exchange traded funds (ETFs). People such as Vanguard can give you access to an indexed fund of Australian or global shares for a tiny fee. There are a lot of good ETFs available. You could buy your own portfolio of stocks or a managed fund. I'll leave this choice to you..