This week's column is addressed to readers between 45 and retirement age - the baby boomers and gen X-ers.
Good news: it's never too late to get your finances in order. But the quicker you start the easier it's going to be, so stop procrastinating and make 2021 the year that changed your life.
A great way to start would be to get a hold of my new book, Retirement Made Simple. I wrote it for you, and it covers a whole raft of essential ideas and strategies in a simple way.
Obviously it's impossible to condense 420 pages to one article, so today I'll focus on two of the most important ones.
A primary goal should be to arrive at retirement with your home paid off, and one of the most common questions I receive is whether it is better to focus your resources on paying down the mortgage, or on boosting your superannuation. It's a no-brainer: boost your superannuation.
Think about it - your mortgage interest rate should be no more than 3 per cent per annum, and a good superannuation fund should be returning close to 8 per cent.
Furthermore, any money you use to pay down your mortgage is made from after-tax dollars, whereas concessional contributions to superannuation lose just 15 per cent in tax.
Here's a case study example: A couple are 15 years away from retirement and owe $300,000 on their mortgage.
They have negotiated an interest rate of 2.5 per cent, but due to inertia have left their monthly payments at $1185.
At this rate the term will be 30 years. And because of the way the mathematics of compound interest work, their balance after 15 years will still be $180,000. They need to take action.
The most obvious strategy would be raise the repayments to $2,000 a month, which would pay it off in 15 years. This strategy would require extra payments of $815 a month.
They are in the 34.5 per cent tax bracket so the pre-tax cost of $815 a month is $1250 a month.
Instead of boosting the mortgage payments, they could contribute $1250 a month as additional superannuation contributions.
These payments would be tax-deductible, as long as their total concessional contributions, including the employer contribution, did not exceed $25,000 a year, per person.
After contributions tax of 15 per cent, $1250 a month becomes $1063 a month. If their fund returned 8 per cent there would be an additional $350,000 in super in 15 years.
They could withdraw $180,000 tax free to pay the mortgage off, leaving a bonus of $170,000 in their superannuation.
This highlights the power of a good strategy. By investing $1250 pre-tax a month into their future, this couple can achieve $815 a month paid off the mortgage, or $1063 a month invested in super.
By choosing the better strategy, they should be able to pay off the house at retirement, and retire with an additional $170,000 to draw on.
If your house is paid off, superannuation is the perfect vehicle. If you are earning $100,000 a year now, your employer should be contributing $9500 a year.
You can contribute an additional $15,500 a year, for which you can claim a tax deduction. This would be a net $13,175 a year after contributions tax.
Keep this up for 15 years and there should be an additional $360,000 in your fund. And of course you won't draw it all on the day you retire.
If you left the whole sum to grow, a further 10 years could see it worth $1 million.
While your own situation will fall somewhere between those extremes, you can be sure you will have given yourself a much more comfortable retirement.
As you have just read, simple, inexpensive strategies can make a major difference to the amount of money you have in retirement. No-one can slow the passing of time, but you can make it work for you by acting now.
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Noel answers your money questions
You have often written about capital gains tax on death, and pointed out that death does not trigger CGT - any CGT liability would normally pass to the beneficiaries.
But we wonder what would be the situation if a couple jointly owned a share portfolio, and one member of the couple died. Automatically, the survivor would receive the 50 per cent share that was owned by the deceased. What is the capital gains tax position?
The survivor would still inherit the cost base of the deceased. For example, if a couple owned $200,000 worth of shares, which cost $50,000, the holding would be worth $100,000 each with the cost base of $25,000 each. On death the survivor would own $200,000 of shares with a cost base of $50,000.
In other words, no CGT liability is triggered. Keep in mind that the above comments apply only to shares acquired post CGT. Shares purchased pre CGT 20 September 1985 have a different cost base for the surviving spouse. The cost base for pre CGT shares is the market value of the shares on the date of death.
I am 60, and in full time employment. My total superannuation balance at June 30, 2020 was $1,575,566. I am in accumulation phase, and am not in any "bring forward" arrangement. What am I entitled to make as a non-concessional contribution in this financial year? Is it $100,000, or the difference between $1,600,000 and my transfer balance cap which is approximately $24,000, or can I use the bring forward rules and contribute $300,000?
If your balance was slightly smaller you could use the bring forward rule and contribute $300,000. However, there is a special rule which affects those with balances over $1.5 million but less than $1.6 million - in that situation the maximum non-concessional contribution is limited to $100,000.
I earn $90,000 a year and my wife earns $35,000 a year. I am 57 and my wife is 54 years old. We live in a company provided accommodation. We do not own a house or any investment property. Our savings are in superannuation in a growth fund.
Our combined superannuation balance is around $400,000. We plan to retire at age 65. Your retirement calculator shows that with a modest 7 per cent return per annum, our combined superannuation should be around $850,000.00 when we retire. We can then buy a property for $500,000 and use the rest of the super with the pension for our retirement. My wife is concerned that we do not have a house now. However, I feel ramping up the super is the best tax effective strategy.
It would certainly make sense to ramp up your superannuation, but you need to keep in mind that by the time you get to retirement age, the type of home you wish to buy may have substantially increased in value. Therefore, I think your first step should be to get to know the market in the area you wish to buy. You have provided no details of your other assets but you could think about having a goal to raise say $50,000, which could be used as a deposit on a home if you see an upward price movement.
Given that the net yield on a rental property should be at least 4 per cent per annum, and your interest costs should be at no more than 3 per cent per annum, the property should be positively geared from the outset, and would require no cash contribution from yourselves.
It would be reasonable to assume that your superannuation should grow at a faster rate than the investment property, so buying a cash flow positive house with minimal deposit, would enable you to maximise the assets you would have working for you. You could even use extra concessional contributions to super to eliminate any tax on the net income from the property.
There should be no capital gains tax implications when you move into it - these will only occur when you dispose of the property which may well be many years away.
- Noel Whittaker is the author of Retirement Made Simple. His advice is general in nature and readers should seek professional advice before making financial decisions. Email: firstname.lastname@example.org