Ready for Retirement.... What to do?????



From: Seagull .

My husband and I are 64 and 62 respectively and about to retire. We have $1.2m in residential investment property in Australia(fully paid for) that we manage ourselves. We are wondering whether to sell all or some of this and put the money into a DIY super fund. We already have a fund set up with about $300,000 in it mostly as deducted contributions. We are very conservative investors and if we sell real estate and put the money into the fund would only invest it in Term Deposits with the large banks.
If some one has some thoughts about our situation we would appreciate you sharing them with us.
With sincere thanks,
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Reply: 1
From: GoAnna !

Why not hand the property over to a property manager and continue to enjoy both the income and growth?

GoAnna !
(aka Anna before she got real)
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Reply: 1.1
From: Rasputin .

I agree, why get rid of the property, if it making enough income keep i ,espicially if it can afford to pay a manger out of the profits..

Then just live off the income and use the super you have for any holidays and such

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Reply: 2
From: Mike .

Hi Seagull,

Have you noticed the many financial institutions collapsing over the past few years leaving investors stranded? Why would you risk giving all your assets to these financial institutions?

Hang on to the property. Convert the equity into an Immediate Annuity.

The main issues to get advice about are Tax and the Pension.
See if it is possible to qualify for pension fringe benefits.

Regards, Mike
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Reply: 2.1
From: Seagull .

Thank you to all you kind people who have responded to my message... it is just so very interesting to hear 'ordinary' responses after speaking with two financial advisors who were selling something: very refreshing. I have always avoided having someone else manage my properties and that prospect is something I would have to work very hard at coming to terms with. I would be interested to hear about other people's experiences. The other thing of concern in the personal taxation issue. I find it hard to understand just exactly how much one saves on tax and running expenses of a DIY super fund compared with paying the normal amount of tax on income from investment property. I wonder if anyone has the figures to enable a comparison to be made??
I am very thankful that I am in a very good position for retirement but I want to make the best decisions if I can.
Warmest good wishes,
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Reply: 2.2
From: Seagull .

Mike, thank you for your reply. You wrote "Hang on to the property. Convert the equity into an Immediate Annuity". I wonder if you would be so kind as to explain what you mean by this.. do you mean the equity in the property, or the equity in our DIY super fund. Also, I understand that an Annuity is something that one purchases from an Insurance company that can be drawn upon for one's lifetime. Is that so?
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Reply: 1.1.1
From: Seagull .

On 5/5/01 2:48:00 PM, Rasputin . wrote:
>I agree, why get rid of the
>property, if it making enough
>income keep i ,espicially if
>it can afford to pay a manger
>out of the profits..
>Then just live off the income
>and use the super you have for
>any holidays and such
That is a great idea Rasputin, we hadn't thought of this. The residential properties are brick but need some updating so I am thinking I may sell one and use some of the money to update bathrooms and kitchens in the others and keep them. The income is certainly enough to pay a manager if I can bring myself to trust one!!
Thank you very much for your thoughts,
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Reply: 3
From: Rasputin .

Only thing that concerns me with annuitys (if I recall correctly) is that yes it will pay you a set amount each year for the rest of your life, but if you die early you lose al lthe money left in the annuity, you are basically betting against the insurer that you will outlive your annuity.. I dont think insurance companies lose too often

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Reply: 2.1.1
From: Robert Forward

You could, however, move your unencumbered property over to your super fund and as such you will only be paying super fund tax. NOTE as you stated their is nil loans on the property which must be the case to move them into your super fund.

Then also any monies you spend on upkeep/maintenance on the property will also reduce the amount of tax that the super fund pays.

But please note. This is just my thoughts and you will need them checked out by a qualified person.

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Reply: 2.3
From: Sim' Hampel

On 5/5/01 8:23:00 PM, Mike _ wrote:
>Have you noticed the many
>financial institutions
>collapsing over the past few
>years leaving investors
>stranded? Why would you risk
>giving all your assets to
>these financial institutions?

I have spent quite some time talking to my father-in-law this weekend who is approaching retirement in the next 4-5 years.

He has these exact concerns... he has seen numerous cases in recent history of trustees mismanaging funds or companies going under and taking all the life savings of people with them.

He is looking at ways of increasing his property portfolio to avoid or minimise this risk.

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Reply: 4
From: Guy Wood

Maybe set up a line of credit against your property & live off those funds.
You'd pay no tax because the line of credit isn't income. Your capital gains each year should be far more than your cost of living, so you'd not be eating too far into your asset base.
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Reply: 4.1
From: Seagull .

On 5/6/01 5:10:00 PM, Guy Wood wrote:
>Maybe set up a line of credit
>against your property & live
>off those funds.
>You'd pay no tax because the
>line of credit isn't income.
>Your capital gains each year
>should be far more than your
>cost of living, so you'd not
>be eating too far into your
>asset base.

I have thought about this Guy but what about the interest payable on the line of credit drawings?
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Reply: 4.1.1
From: Gee Cee Cee


I have only just read this so I will just give a quick answer.

I congratulate you on having reached this stage of life and at being so successful.

My in -laws are the same age and luckily have their own home . Unfortunately though living from week to week is a struggle on a pension. Yet they still do not see what I do as a honest way of making a living. Their thoughts are that I should have a Real Job. In their opinion I don't earn my money like a wage earner. However if their son does a overtime shift then he is really caring for his family.

A few questions:

Do you own your own home?

Are there a number of properties or just a couple ?

Are they all in the same area or in different states ?

Are they in areas that are growing or declining ?

Are they old and require a lot of constant maintenance . Not just in $ but also in time required to arrange such?

If you don't want to answer anything here just email me. No I am not selling anything or charging financial advisor fees. I will just give you my opinion.

Gee Cee

PS. After all of these yrs of building up a a portfolio of property and managing it yourself. Why would you sell it all and just hand the hard earned $ over to someone else to look after.

(A portion maybe but not the whole lot.)
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Reply: 5
From: Jeanette .

I am aware from friends that as you get older, the worry of having property (I'm not really sure what the worry is) sometimes gets to be a burden, so perhaps you could liquidate some of your property. You could read 'More Money for your retirement' by Harold Bodinner - $19.95 in any major bookshop. Very good book and up to date information.
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Reply: 5.1
From: Felicity W.

Hi Seagull
I have two IP and managers for both of them. All I can say is they have been totally worth the money we pay them. We've been very unlucky with tenants - one property the woman split up with her partner and then went a bit nuts, the other one they people broke the lease. Both of them ended up in tribunals etc, and we did absolutely nothing, other than pay the property manager the usual fee and pay the landlord's insurance.
I would never own a rental property without one now!!!
Keep smiling
Felicity :cool:
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Reply: 2.2.1
From: Mike .

Hi Seagull,

Following on from my previous post you were interested to know what I meant by "converting the equity of your property into an Immediate Annuity".

That remark was off the cuff and offered as a possible strategy in preference to selling the properties and investing the money with financial institutions that may collapse. I encourage you to find a strategy that provides an adequate income without risking your capital. If that means holding onto your properties, so be it. If that means incurring more tax, so be it.

Once you retire, if you left things the way they are, your income would come from two sources: the DIY Super scheme and rentals from your IP's. Question is, can you rearrange your assets to minimise tax, hedge against inflation, qualify for pensioner concessions, all without risking your capital?

Since this is a complex issue it requires the expertise of a Financial Advisor who knows the requirements for qualifying for a part-pension under the provisions of the Assets Test or the Income Test. BTW you only need to qualify for as little as one dollar of the pension to get the full pensioner concessions.

Immediate Annuities have full or partial exemption from the Income Test so would be a preferred source of income than rent which is not exempt.

Your home is exempt from the Assets Test but not so your IP's. Ideally, you would be in a better position to qualify for the pension if most of your capital was in your home. However, if this were the case, you would fall into the category of "asset rich, cash poor".

The solution here is what's called a Home Equity Conversion Scheme (HECS). Not to be confused with a Home Equity Loan. Here are a couple of definitions:

A home equity conversion agreement is a mechanism which allows a homeowner to convert all or part of the equity locked up in their home into cash or a stream of income. A key feature of a home equity conversion agreement is that the loan (including interest) is generally not repayable until the homeowner moves out or dies.

Another definition:
A loan secured by a mortgage of the borrower's home under an arrangement which does not require periodical payments of either interest or capital, the intention being that the total debt will be repaid on the death of the home owner (or on the death of the survivor of a married couple).

As I understand it, the income stream from HECS is exempted from the Income Test.

I don't want to get bogged down in details because I am not qualified to discuss those. An important point to consider, however, is make sure the lender is insured if they default on the arrangement (ie if the company collapses). They will be insured for losses incurred if you outlive the arrangement.

Centrelink provides a free Financial Information Service (FIS) so may I suggest you talk to them and see if it is worth restructuring your assets. I've attached a text file which explains FIS's services.

Regards, Mike
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Reply: 4.1.2
From: Guy Wood

Hi Seagull,
The line of credit idea is something I'm just coming to grips with. We're currently running with it in a small way, but I can see how you could retire using the idea, pay no tax, keep all your property.
You set up a line of credit of say $150000 against your property, then live off these funds. Say you have living expenses of $3000 per month, then I guess you'd accrue interest charges @ around $240 per month (at 8% interest), at the end of the year you'd owe around $40000.
You haven't paid back the interest, it just accrues.
You could live like this for say 3 years, by which time your property is worth around $1.4m @ 5%pa capital gain, so you take out another line of credit against the increased capital value.
If you spend less, or get a higher gain you draw down funds less frequently.

The way I see it if I live off rental income
or wages I pay a fair bit of tax, If I live off the line of credit my "tax" is the 8% interest I 'pay' to the bank.

I guess these ideas have come pretty much from Peter Span & Keith Young of the investors club.
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From: Mike .

Hi Guy,

In your post you say: "The way I see it if I live off rental income or wages I pay a fair bit of tax, If I live off the line of credit my "tax" is the 8% interest I 'pay' to the bank."

Have you forgotten that the IP's are still producing assessable income in the form of rent? Seagull will still pay tax on the rental income whether it is used to live on or not. What is Seagull meant to do to reduce tax on the rental income?

Regards, Mike
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