Financial expert George Cochrane answers your questions.
I'm looking for a perspective on what might seem a trivial financial matter. I'm a 70-year-old married male, in great health, with no debt, no credit cards, no foreseeable major expenses. I have superannuation and shares worth $1.4 million. I have a half share in a $2-million home with my wife who has a separate $1.4 million in super and shares. Both of us are retired, with no income except from an annuity and dividends. The complication is that I'd like to spend a net $110,000 on a new campervan to travel around a bit on my own. It's small enough to use for my daily use as well and will replace my existing car. I could sell it in five to eight years time I guess, anticipating 40 per cent residual value on sale. I'm very wary of spending now that I'm retired, with no income. From a financial perspective, is purchasing a $110,000 campervan: 1. A responsible decision or 2. An irresponsible decision? I guess the issue is one that traverses the financial line - "spend 10 per cent of your money on a campervan ... are you crazy?" versus the emotional line "What the hell did I work for 50 years for if I can't spend a few bob on lots of travelling/a boat/a campervan etc!" I'll watch with great interest to see whether I'm doomed to motel rooms or can look forward to my own little home on wheels! P.S.
I must admit to being in favour of "the pursuit of happiness" as being one of life's major goals, so I would tend to favour the campervan.
However, as I like to point out, there is often no "right" or "wrong" to such decisions, but there are always consequences. Declarations of independence, as the American founding fathers discovered, often lead to wars. Now it sounds as though your wife is not of the travelling variety! So I suspect it is important that you seek agreement from her as to your plans before visiting the next caravan and camping expo.
Otherwise you could return to an empty house with only a short note inside, which would make the trip quite expensive, all up.
I've just finalised a protracted financial settlement with my ex-husband and agreed to new parenting arrangements. I am 40 and have three young children in my care 100 per cent of the time. I work full-time earning about $110,000. I have $224,000 in superannuation and hope to retire by 65 at the latest. I own my home outright (value of $550,000) and also three investment properties with a total value of $1,055,000, total debt of $560,000, and annual rent earned $47,580. I have just refinanced and am happy with an interest rate of 3.92 per cent. I've started salary sacrificing $600 a month into super and have about $40,000 in cash in an online savings account. What should I do with the $40,000 cash and any disposable income I may have left over each month? I would like to dip my toe into the sharemarket, what would your suggestion be? Or do you recommend keeping my money in cash or to pay down my investment loans? I have also recently reviewed and purchased income protections, life and TPD insurance. I have also updated my will, enduring guardian and power of attorney. I have two overseas holidays coming up in the next two years that will cost about $3000 each, but otherwise live simply and want to save for a secure future and unexpected costs. N.K.
You will need a fair bit of saving for your retirement, especially if you want to retire debt-free, which I usually recommend, and also keep your properties, assuming you might be thinking of giving a property to each child.
If you are paying principal and interest over 25 years on your mortgages, which I hope you are, it will be costing you more than $35,000 a year. I suspect you would be paying roughly half your rental income in fees, costs and interest, on which basis, I estimate you are bringing in an estimated $78,000 a year after tax, super contributions and interest deductions. So, despite your high income, you would be doing it tough bringing up three young children.
At a guess, given that you have three properties totalling $1.1 million, you probably live in a rural or semi-rural area. However, in the long run, you may need to sell one of the properties to pay off all debts and, depending on the area, outlying properties can sometimes take a long time to sell. Sharemarkets are highly priced and I'd like to see you using an offset account linked to your mortgage. So place your cash into that account, and direct all your cash income into it, leaving money in the account for as long as possible, withdrawing only sufficient to pay bills.
If you continue to salary sacrifice on top of an employer's 9.5 per cent contributions (ignoring any scheduled increases), indexed at 2 per cent, you could accumulate between $1.15 million and $1.65 million over 25 years, depending on whether your super earns either 3 or 5 per cent and franking credits eliminate half the tax.
An amount towards the higher end, say $1.5 million, would allow you to budget for retirement income of $75,000 a year, indexed at 2 per cent, in 2042 dollars. However, this would have the buying power of roughly $36,000 a year in today's dollars, assuming a 3 per cent rate of inflation between now and then. That could be conservative since, as I've mentioned before, I suspect we will enter a period of rising inflation.
Taking a long view, you'll do well providing you remain thrifty.
We are retired with $311,000 in shares, $167,000 cash and deposits, $613,000 in three pensions from First State, CARE and REST and a further 149,000 in Catholic Super. We own our home and also receive a State Super pension of $43,000 a year. Of the shares, $127,000 is in CBA with reinvested dividends. Should we stop the dividend reinvestment? If we withdrew the $149,000 in super to better balance the assets between us, where should we put it? Gradually into a listed investment company? What do you think of accounts which we already use such as Bankwest's Hero Saver and RaboDirect 90 day Notice Saver? With the conditions involved are they a marketing ploy? O.U.
I favour dividend reinvestment as a means of saving, but it is not useful if you need the income to live on. You have not mentioned how much you need to meet expenses but unless it is a high figure, you seem to have plenty of income.
The trap with dividend reinvestment is that each six-monthly reinvestment requires a separate capital gains tax calculation when the shares are sold, either by yourselves or by your successors. You need to keep adequate records, a spreadsheet alone being insufficient proof of purchase, otherwise the entire sale value can be treated as income.
Bankwest's Hero Saver, with no minimum required, and no fees, promises an interest rate of 2.6 per cent provided you deposit at least $200 a month and make no withdrawals, otherwise the rate drops to a minuscule 0.01 per cent.
RaboBank's RaboDirect 90 day Notice Saver is basically a term deposit that transfers the money to a transaction account at the end of your chosen term. There are three "Notice Saver" accounts to choose from: 31, 60 and 90 days. For amounts under $250,000, the rates are 2.5, 2.55 and 2.7 per cent respectively, with lower (yes, lower) rates for larger amounts.
I agree, they can be seen as marketing gimmicks, but I'm always in favour of taking advantage of higher interest rates on offer to savers, providing you read and understand the fine print.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00.