THE WEALTH BUILDER: I’m about to retire and have $1million in super – should I sell an investment property to top it up?

James Wrigley, chief financial advisor at First Financial, answers questions about money every Wednesday.

Hello James,

My wife and I are nearing retirement and have about $1 million in super money.

We also own two investment properties worth approximately $600,000 each, which yield a net return of approximately 6 percent, with no debt. We own the house we live in.

Should we sell one of the investment properties and transfer it without concessions?

Thank you,

John.

Hello John,

With the little information you have provided, it is almost impossible to draw a conclusion as to whether you should sell a property to top up your super.

The properties you own provide exceptionally high rental income. A six percent net income (that is, all costs associated with owning the property) is almost unheard of for residential investment properties, but somewhat achievable when it comes to commercial real estate.

When it comes to your retirement, your access to cash and spending money becomes the most important priority, less so the value of the assets you own. Start by looking at what income you need to have the retirement you want, and then analyze whether your current mix of assets can support that.

If we start with your investment properties, 2 x €600,000 = €1.2 million at a net income of 6% means you earn approximately €72,000 per year in rental income. Assuming you own the property jointly, this income will be split between you and your wife, so that’s $36,000 each. After tax, that’s $33,000 each. So your combined initial retirement income is $66,000 ($33,000 x 2).

Now let’s take a look at your super. With a combined super of $1 million, if you were to take a pension from this balance at retirement (after age 60), you would need to take a minimum of 4% or $40,000 between you – the pension you get from the super receives is tax free. Add this to the rental income and you have a retirement income of $106,000.

Just by drawing down the minimum pension, your super balance will last a very long time. However, the vast majority of people use their savings to finance their retirement. Minimum pension requirements start at 4% but increase to 5%, 6%, 7% and more as you get older. Due to this increasing minimum pension requirement, your super balance will eventually show a downward trend.

We will then arrive at your desired pension income again. This number is unique to you, but if I were to look at what others with similar wealth positions as you spend in retirement, that number is about $120,000 per year. The $106,000 we identified above is a nice retirement income, but it’s not the $120,000 that many couples spend.

Looking at your situation, the main driver for selling a property to top up your super would be tax driven rather than access to capital driven (you have plenty of liquid capital in super that you can draw on for years to come to supplement your expenses). You do not pay much income tax on the rental income, but you do pay some. If this money were instead invested in retirement mode through your super fund, you wouldn’t pay that tax.

The other big consideration here is capital gains taxes. If you were to sell a property, you would undoubtedly have to pay capital gains tax. If you sold after you retired, early in a financial year, so that you had not yet earned much rental income and had used personal concessional contributions, you could significantly reduce (or even eliminate) capital gains tax. Then that money invested through your super fund, again in retirement mode, would be exempt from capital gains tax in the future. A small increase in capital gains taxes can save you and/or your estate a significant amount of money.

Find a financial advisor with whom you can sit down and talk through some scenarios in detail. Only then can you determine what is best.

All the best,

James.

Send your questions to James thewealthbuilder@dailymail.com.au

James Wrigley is a representative of First Financial PTY LTD ABN 15 167 177 817 AFSL 481098

This column is written for general information only.

Every effort has been made to ensure its accuracy, but it is not intended to be a complete description of the matters described. It has been prepared without taking into account personal objectives, financial situation or needs. It does not contain any securities advice or recommendation and should not be construed as such. Furthermore, it is not intended to be relied upon by recipients when making investment decisions and does not replace the requirement for individual research or professional tax advice.

First Financial Pty Ltd makes no representations or warranties as to the accuracy, reliability or completeness of the information contained herein. Except to the extent that liability cannot be excluded under any statute, First Financial Pty Ltd and its directors, employees and advisers accept no liability for any errors or omissions in this presentation or for any resulting loss or damage suffered by the recipient or another person. . Unless otherwise stated, the source of all graphs is First Financial Pty Ltd; and all performance figures are calculated on an exit-to-exit pricing basis and assume reinvestment of earnings, taking into account all fees and charges but excluding entry costs. It is important to note that past performance is not a reliable indicator of future performance.

No part of this presentation may be used elsewhere without prior permission from the author.