$900 000 windfall - enough to retire now?

You probably haven't had much experience in the stock market, that sort of comments is fairly general for most people but there is strategy and you not always at the mercy of the market

having said that property is the easiest for buy and forget and don't worry about massive volatility
you do need to be on the ball a bit with the stock market

 

Don't forget you can insure your building!

However same as property can collapse so can shares.

Each has their own pros and cons and to me I bet on both horses, although my assets spread is far greater in property.

Right now from a capital investment point of view I am 40% shares and 60% property but from an asset value I am 8.94% shares and 91.06% property

Got to enjoy leverage

 

No- not enough to retire. It needs to be turned into an income stream. And to do that you need to take advantage of leverage and defer retirement plans for 7-10 years...

Here's a simple, low risk, mathematically irrefutable plan /hypothetical worth considering.

1. Take 220K of the 900K and pay down the PPOR debt. This way, whatever else happens, you own the roof over your head. It will also free up 1.5 - 2K of cash flow per month ( I assume?) which currently goes towards servicing the P&I loan . That represents a 18-24K of income which would then become available to use for other things...

2. Take 553K of the 900K and pay down the INV property. This way, whatever else happens , you now own the roof over your head AND have an unencumbered INV property generating @ 39K per year... or @ 35K after expenses.

This means you have 18-24K LESS expenses per year ( PPOR mortgage) and @35K MORE income per year ( INV property)

This represents a potential turn around of @ 53-59K in disposable/investable income which is currently committed to servicing those two debts

3. Consider ( after speaking with a planner) taking the remaining 127K of the 900K and paying it into your Super as a non concessional contribution . Consider an SMSF - strongly

4. Consider ( after speaking with a planner) also paying all or most of the 70K that is currently in Offset in your Super as a non concessional contribution ( you and hubby can put 100K each in) . Dont fret about the 70K being "lost" or "forfeited" remember that you will have an additional 53-59K per annum available to you as outlined above. Whats critical is to get a sizeable amount transferred into your Super so you can use leverage there as well to turn it into a tax effective income stream in retirement

5. You and hubby could then consider (after speaking with a planner ) salary sacrificing part of your salary into your Super/SMSF, up to the 25K concessional limits each, in order to really start growing your Super. It would also help reduce your taxable income, which would offset all or some of the tax that would otherwise be payable on the 35K extra income being generated from the unencumbered INV property


So this is where you'd be

1. Unencumbered PPOR with 18-24K NET additional funds at your disposal per annum
2. Unencumbered INV with @35K GROSS additional income at your disposal per annum
3. Much larger Super balance immediately + larger annual contributions ongoing

From this position, I'd be considering gearing into a cash cow or two in your personal names . You should be able to pay off the first one in 7 or 8 years using all that extra income at your disposal + the surplus income from the two cash cows. And the second one would be paid off 3 or 4 years later using using all that extra income at your disposal + the surplus income from the two cash cows

I'd also be considering doing exactly the same ( after speaking with a planner) using a LRBA to gear into a cash cow resi dwelling within your SMSF, which you can also pay off in 7 or 8 years as well, using the 50K of combined concessional contributions and the surplus CF from the property.

Fast forward 7 or 8 years, just as you are entering your 60's...

PPOR owned outright
INV #1 owned outright, generating @ 50K taxable( I have assumed 50% rental inflation in 10 years and 50% holding cost inflation )
INV # 2 owned outright, generating @ 50K taxable
INV # 3 owned outright ( or very nearly ) generating @50K taxable

If this was 50/50 with hubby, you'd be earning @ 75K taxable each... which washes out at approx 59K NET each. ie 118K combined

INV #1 via SMSF - owned outright, generating @50K ( taxed at 15% only, and eventually at 0% )


Depending on borrowing power, you may well be able to be a little more ambitious than this. What I have outlined is simply a very logical and straightforward way to put the 900K to work using cash cows and dividend reinvestment , and requires only 50% rental inflation in 10 years in order to produce these outcomes. It also requires ZERO CG... Im not saying that's what to expect...Im just pointing out that it doesnt rely on growth to manufacture a combined 6 figure NET income within 10 years.

If owning properties becomes a chore at that point , you could then start strategically selling down your personal INV properties , one per year to manage CGT, and reinvest the monies elsewhere in order to produce your passive income for retirement... and then sell the SMSF property in pension phase to avoid CGT as well.

This is in simple terms, about leveraging the 900K into ongoing passive income which will meet your need to retire within 10 years or so, but will also provide income for the 15 , 20 or 30 years beyond retirement. It's also an APRA smart strategy. Doesnt rely on growth to work. Relies singularly on dividend reinvestment/debt reduction... and as the numbers above demonstrate...it just works.


I would only stress that at 50 and 52 respectively, borrowing money to invest is still reasonably straightforward for you - particularly if you are happy to borrow P&I ( which you should. The game is to pay them off fast) and have an unencumbered PPOR ( which you would in the above hypothetical) ... but if you delayed much longer, getting loans will become very difficult .

Anyhow, go talk to a planner ... that's essential. You need to seek advice. Hopefully they wont muddle you up with all kinds of convoluted, non performing ideas where leverage isnt possible and outcomes rely on growth alone ...

Sometimes simple just works. The numbers dont lie. Anyway, as I started with... worth considering

 

- tenants
- council rates
- land tax
- water rates
- insurance
- interest
- repairs
- mainentance
- tenants
- property managers
- capital gains tax
- returns

I have a residential property because I like to add value. As a buy and hold it has a lot of disadvantages as outline above.

 

- risk & liability
- price stagnation or falls
- time involvement
- increased legal and accounting costs
- tenants (again)

 

Gotta love those tenants!

But really, property is a fantastic wealth creation vehicle for people prepared to put in the work. There are issues and costs that people need to be aware of when moving into retirement phase. It will be fine for some people but others won't want to deal with tenant hassles in retirement (for example).

 

We are seriously thinking about selling the PPOR now and investing in "other asset classes" given we have around $1.4 million tied up in a place we use only a fraction of. We still have our other house in Sydney... talking to a financial advisor next week.

 

Where would you live?

Keep in mind the main residence is going to be the only tax free asset you get (outside of super) so having a more valuable one is one strategy to consider.

not directly related but have a read of this

Tax Tip 168: CGT Strategy for living in an area with no expected capital growth Tax Tip 168: CGT Strategy for living in an area with no expected capital growth

 

We would travel in our caravan and do house-sitting and have no fixed address for quite some time...

 

Sounds good, but are you aware of the 6 year rule? You could keep your house for up to 6 more years while not being there and it can be rented yet still remain exempt from CGT.

Say you sell now for $800,000 - that might mean about $750,000 in your pocket after expenses. You can then invest that and get a good return possible.

But instead what if you kept that house for 6 more years. It may growth by say 30% during that time. You could then sell it for $1,040,000 perhaps with $1mil in your pocket after expenses with no tax payable. This equivalent to making another $200,000 after tax which might be the same as earning $250k before tax.

If you sold and invested $800k you would need to make that investment grow by $250k before you are ahead.
plus the house would generate rental income while holding it. You could also borrow against, it if you can service, and then invest.

if you sell and live on the road you also won't have another property growing tax free.

 

Good point. It's all about how do we obtain freedom sooner rather than later while still having asset growth for the future. We could just rent the property and borrow against as well to buy other asset classes. Will see what the financial advisor advises and will share...

 

And in 6 years you could change your mind and want to buy back in and find the entry costs + value change both make it difficult. You may find the $800k property could cost $1.05m to replace + duty etc. If the financial investments suffered a market correction the gap could widen.

Income on financial investments are taxed annually where unrealised property gains arent. So property has a untaxed growth potential where shares etc dont. This means a higher growth rate from shares etc is needed to address same net growth.

Financial investments and property do not have an identically capital stable base. Shares could crash 20% and property rises....This happened in the 1990s recession.

Switching to financial investments may impact if a market correction occurs. If shares dropped 20% then a market recovery of 25% must occur just to break even let alone obtain further growth

 

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This is a good point. Selling means less capital base compounding.

 

Its rare that financial advisors will discuss or recommend property. Not completely unheard of, but certainly the exception rather than the rule. You're more likely to receive advice around non leveraged assets... so you'll need significantly better performance out of those assets in order to match the performance of even a modestly successful CF+ property strategy that generates dividends similar to those available in non leveraged assets . Leverage just provides all kinds of advantages....in simple terms you can purchase much larger asset bases and therefore much larger amounts of dividends/surpluses. Then use them to retire debt . This allows you to hold a much larger debt free asset base over time. The 900K is turned into a much larger amount, and the income from the much larger amount is retained for life ...

I outlined a very simple, low risk and extremely effective hypothetical for you in an earlier post ,for your consideration... would be interesting to see whether your planner supported something along those lines if you present them with the numbers I outlined..

 

Your ppor is worth too much. What would I do? Well I don't care for the capital cities. I would sell everything (locking gains) buy a great house in a smaller country or coastal town as cheap as 400-500k (if you go two or three beds even better). You can make it reasonably close to family or close to an airport and just do regular trips by cheap air. Atherton Tablelands close to Cairns for example. I'd (both) work part time in an easy job as much to meet people as for the income. You can renovate, grow veggies, chooks even small livestock if rural. In fact I personally would by a slightly cheaper house and a live aboard cruiser and do a fair bit of cruising, both domestically and around the world. Or for the adventurous, just by the boat, throw the rest in an ETF and cruise around the world perpetually. You can share costs with guests. No rates, car expense, car insurance.

 

We already have another house in Sydney so this is not relevant to us.

 

Well been to an initial consultation with the financial advisor. He reckons we are safe to sell the PPOR invest and receive ongoing cashflow and capital growth. I will post more specifics about what he recommends in the "other asset classes" forums. However, it's all pretty much in various ETFs LICs and specific share classes that are what he calls "moated'. Investing in the top 200/500 and some gold for backing. No Bitcoin..We can travel, look about and very likely purchase a PPOR in a holiday/lifestyle location that we can holiday let when not there.

 

I've been investing in the stock market since 1992 and have experienced things you wouldn't know but I'd still love to know your strategy so that you're not at the mercy of the market.. are they stop losses? Lmao

Yes I said that at least you have the land if it burns down but insurance will cover it. My ratio and asset value is similar to your own. I would never invest 80%+ of my capital in something I've got no control over (share price) and which can go to $0.