Retirement advice - sell IP's and what to do with proceeds?

Don't disagree with the above at all. Spot on in fact.

But as an aside, I did speak to a FP who looks after high net wealth individuals recently. His message to me (paraphrased to a great extent of course): if you continue to keep buying ARG, AFI, BKI, MLT when they are on discount and use conservative leverage where appropriate, you are doing fine without me.

It was an initial conversation only. He made it very clear that anything he said was NOT advice. Same with my comments above, NOT advice. Do your own research and make your own decisions. I am not licenced to give advice.

 

I know F... All too. I met up with him and his partner last week for a drink

 

With the way Syria, Korea, USA, Russia, China, ... are behaving, I believe the world share markets are in for a rocky time over the next few years.

There are bound to be bounce-downs and some people will panic. It has happened before and it will happen again.

The GFC might become a "distant memory" but it will might replaced by something more recent.

I know people who lived through the 1930's Great Depression and they are still scarred by it. And that is nearly 80 years ago.

 

As others have said, your parents’ retirement plan needs to consider a lot more than just the info you’ve posted. Many different scenarios can be suggested that may or may not suit them.

OTOH you’re absolutely right in questioning the viability of their current setup. It does have a lot of weaknesses, just to say the obvious:

- Lack of diversification: over $1M with just 2 assets providing big chunks of their income,
- Milk bar premises probably in the high risk category, exposed to economic slowdowns, market changes, operator’s skills, extended loss of rent, maintenance costs due to age, etc…
- High-rise apartment with low yield tending even lower and not keeping up with inflation,
- No mention of a cash buffer or risk strategy.

Good on you for asking questions that could lead to a comprehensive review.

 

Thanks for the inputs. It's great to hear some different and interesting viewpoints. Don't worry they definitely won't be rushing into anything. Happy to share a little info to put into perspective,

- Early 70's and plan to live at least another 20 years!
- Own own home and no plans to downsize
- No other debt, and no plans to take on any or leverage
- Only small amount of other income from a part sibling ownership of a regional commercial (also used as milk bar!)
- Like many Australians are about to lose part pension which will have a meaningful impact
- Don't pay any tax as under threshold
- Smallish buffer of 6-12 months income. Hard to foresee unexpected expenses
- Lack of understanding/fear of other asset classes
- In reality the extended loss of income would hurt a lot more than capital loss

I agree their current structure clearly has weaknesses and the risks such as extended loss of rent in particular. I started explaining how LIC's spread their money/risks across over 100 of Australias largest companies rather than an individual property. But that they would have to accept the risks that in a GFC style event the share price could drop up to 50% but later recover, though their dividend income would likely only drop slightly.

I realise that the sharemarket would only be suitable for them if they are able to cope with the increased capital risk/volatility, otherwise it would not be suitable for them. I think a bit of education might be really good for them here but unsure where to start. Maybe I should sign them up for a Peter Thornhill Class?

 

That is why solely focusing on yield is a bad idea. I get much better yields than what you are quoting because I buy at better prices. Also, I buy these LICs because they have the ability to grow their dividends over the years.

Enough for whom? We all have different requirements. Also, don't forget capital growth.

Shares are not for everybody. If you are the type to buy high and sell low or don't have the temperament to purchase when markets are tanking, stay the hell away.

I sure as hell did not advocate anybody (especially those retired) to leverage. Leverage could be used sensibly depending on your life stage. Also, there are other ways to use leverage than using margin loans.

Are you referring to the GFC? They were great buying opportunities too.

General comments only. NOT advice.

 

Thanks @Y-man, I know it was not aimed at me. I apologise if my post came across as being defensive. I wanted to mention in my post that my comments were only generic in nature and not aimed at anybody (especially not the OP's family). Hope they get to have a great retirement.

 

Like Steve McKnight used to say, only a fool will tell you that there is no risk in investing. You show me an investing venture (shares, residential property, commercial, term deposits) and I will show you how it can all go wrong. Yes, catastrophically at times.

In the end, there is no 100% safe option. In life and in investing. To be alive is to be risking something.

 

Averaging it all out 4.5% net yield is pretty good, I'd personally keep it!
It'll be hard for them to user the money in a way that has higher returns without risking the capital value of it.

 

Last line... having done the class myself in February, I completely would support the Peter Thornhill class. Now, I'm not sure where your parents are, but Peter has a class in May in Sydney and he'll have one in Melbourne in either June or July.

Now I'm going to fully disclose, I'll be organising the Melbourne event. Simply because he is happy for me to do it, the Brisbane event 3 weeks back went really well. I think the advice he gives is great. He explains why you buy in a downturn, don't sell. He clears the "mental crap" people have and gives direction. You yourself are probably ok and I feel you don't need to attend his presentation. But I don't know about your parents and if they do decide to go into shares with their life savings I want them to be educated before leaping in. Shares are fairly safe investing if you do it long term and don't buy the crap.

 

The cash buffer is to avoid forced selling of shares when there are falls.

As a wise man once said
> Never sell
> No one can predict the market

 

As @truong said your parents have limited diversification which adds risk. This problem illustrates the issue with investment property - you can't really sell a chunk, it's all or nothing.

Selling the property and putting it all into shares increases volatility. There is a bigger chance those shares could lose 50% than the property losing 50%.

I'd speak to a number of different people and possibly some paid advice. But not advice where commissions are involved.

The issues you face are diversification and risk.

 

True.

But one can borrow funds using the IPs as security and rents for debt servicing.

May be be the best strategy but would be better than selling IP and incurring CGT, selling costs, ...

 

You have my interest, I'd love to do the course at some time.
However, if you're going to keep recommending it, I think you should disclose a lot earlier. And also that you've only just started. Although I know you can do it, you don't have the battle scars yet.

 

I have @wombat777 and @trinity168 to thank for getting me into it!

Yes, "new" to shares (well, I did own back in the 1990's (incl woolies float and telstra) /early 2000's too but I hardly knew what I was doing back then). Peter's classes illustrates why to invest in shares and what to invest in. Makes it super simple and clear. He has a long track record (40 odd years of educating in this space - as long as I have been alive) and the numbers and charts to back it up. So I trust him.

With property, I can see these booms are a way to boost your wealth quickly. But booms don't always happen! Sydney's near peak, not sure how well other cities will go, but I have my doubts they can do a Sydney. Therefore shares are a great way to go... plus no maintenance, bills, buying and selling costs, stamp duty, land tax, tenants, pest and building, costs of depreciation schedules etc....
Collect dividends, buy on dips.

Long term income and secondly wealth - i'm confident to have increases in capital if held for the long term.