Whenever I talk to people I sense a feeling of uncertainty.
The stock market is volatile, the property market is running hot in many places, an American presidential election is almost on us, and the prospects for a Covid vaccine still seem to be just out of sight.
But there are optimists among us - just this week Deloitte partner Chris Richardson made headlines when he said that "if things go right, and virus numbers go right, you genuinely start to get a beautiful recovery."
I have long believed that investing involves sticking with basic principles, ignoring what you can't control, and taking charge of what you can control and what you understand.
This came to mind last week when a friend of mine sought my counsel on her personal situation. She is in her mid 50s, happily remarried after a divorce, and finds herself the owner of an unencumbered home in a prime inner-city suburb. Her first thought was to sell it, which she can do free of capital gains tax as it was once her home, and at least have some cash to provide some certainly for the future.
But I reminded her that one of the major strategies for becoming financially independent is to think of investing as a game of Monopoly, and get as many assets on the board you can.
Both she and her partner are professional people with good incomes, and I pointed out to her that in my view it made no sense to sell a prime property, just because the economic conditions were uncertain.
Becoming financially independent is to think of investing as a game of Monopoly, and get as many assets on the board you can.
This is a person who loves property, and has a flair for finding good ones. My suggestion to her was to capitalise on that skill, and borrow against the present property to buy another property in the same location.
Right now she is paying tax on the rents from the property she owns, but she could borrow the entire purchase price of a similar prime property, and still have no outlay of money.
The numbers work - she would owe the full purchase price of one property with an interest rate of 2.5 per cent, while receiving rents from two properties which would be returning at least 3 per cent net.
From a security point of view she has a 50 per cent deposit on a new property so it's hard to imagine how she could go wrong.
Don't forget, the key to making money in property is to get a property in a prime location, add value and then wait for at least 10 years to enjoy the capital growth that an inner-city property in a prime location is certain to provide.
It's easy to get spooked by the current uncertainty, but anybody investing in property and shares must have at least a 10 year term in mind. Yes, there will be bumps along the way, but there will always be a demand for prime inner-city property - this will increase as the population does.
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I must confess if I was in her situation I would borrow against the existing property to invest in an index fund, and not another property.
The index fund would provide a yield of 4.5 per cent franked, would have no ongoing maintenance or other costs, and by definition could not go broke. But it's horses for courses - she likes property, I like shares.
If carefully chosen both these asset classes are fine. Just remember the Monopoly game - the winner is the one who gets the most assets on the board as soon as possible.
Noel answers your money questions
My husband and I, aged 68 and 67, want to retire at the end of this year and get the full pension. We currently earn combined around $98,500 a year.
We rent, but own a debt free investment property worth $385,000. We also have $320,000 in super and around $48,000 other assets like car and furniture.
When we retire can we move into the house or would we need to sell it and buy something else so that Centrelink considers us homeowners? We also want to go and visit our daughter in Canada (post COVID impacts but hopefully get there late next year) for six months; will we lose our age pension if we do?
Centrelink assesses homeownership differently to the ATO. When you retire you could simply move into this property as your residence and you would be considered a homeowner by Centrelink. However, you would need to discuss this with your Tax accountant to understand any implications this may have.
You also mentioned wanting to spend six months with your daughter in Canada. Generally if age pensioners leave Australia for less than six weeks their age pension rates won't change; when an age pensioner leaves for less than 26 weeks the pension supplement will drop to the basic rate and the energy supplement will stop.
If an age pensioner leaves for more than six months then the Centrelink effects will be dependent on how long you and your husband were considered Australian residents between age 16 and age pension age. I do think it would be worthwhile talking to a pension specialist such as Retirement Essentials. They offer a great service for a very reasonable fee.
I read with some dismay your recent article on retirees who can't get credit cards. As you say, the banks have gone overboard with what they think is protecting their clients from overspending - the outcome is dismal. But there is a way out.
Once you have a credit card with a certain limit, the bank will not change that and there is no requirement for banks to continue to check that you have the minimum income requirement. After retirement your income may certainly drop to below the banks minimum.
That would be no problem unless you want to change banks. You would find after cancelling your card you can't get a credit card at a different bank because your income is now below the minimum. I think the bottom line is to keep your credit card after you retire - if you cancel it you may never get another one.
What you say is true and works a treat before retirement. But what normally happens with most working couples is that they have a major credit card only in the name of the highest breadwinner, and to save fees have a supplementary card in the name of the partner.
If, after retirement, the principal card owner dies, the supplementary card holder is unable to get a card in their own name because of the credit restrictions I have discussed here before. This is why it important for a couple to each have a credit card in their own names while they can still get one.
The perfect card is Latitude as they have no annual fees - the downside is no reward points but points have been devalued so much recently that it's not a big issue anymore.
We have a SMSF. Each year our accountant asks that the fund pay us a pension. Usually, the minimum only. My husband is 76 years old and I am 75.
My husband has his own company, still goes to work each day and gets a salary which has been constant for some time. We do not need a pension so why do we have to pay us a pension and deplete our money in the Superfund when this is not necessary?
A fund in pension mode is required to pay a pension each year but your accountant should have told you that you can commute your fund back to accumulation mode at any stage, in which case there is no requirement to withdraw a pension.
The disadvantage is that when you do that the fund will start to pay tax at 15 per cent per annum from the first dollar earned. It's really a matter of doing the sums, and deciding whether you are better off to leave the fund in pension mode, and withdraw the minimum which has been reduced by 50 per cent because of Covid 19, or go back to accumulation mode and suffer the tax in the fund.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. email@example.com