I have 2 young boys aged 4 and 6 years old and some days they are the best of friends, and other times they can be the worlds worst enemies. Sometimes I scratch my head and wonder what happened on these bad days!
When it comes to a self-managed super fund, property and a retiree, sometimes this combination can be a perfect combination and the best friends. Other times however they can be worst enemies and recipe for disaster. Let me explain a little further….
Today a retiree who is drawing an income stream from their super fund (pension) is required to draw a minimum amount each year from their super fund.
Normally it starts off at a low level such as 4% of their super balance if they are under age 65. By the time they move into their 80’s, the minimum balance drawn down has increased to 7% of the member’s balance. If they make it to 90 years old, it hits 11% and anything over 95 it is at 14%.
Essentially, as a person gets older, the government under the current legislation requires a retiree to take more from their superannuation balance.
The problem with this strategy possibly starts to evolve when you only hold a property or multiple properties inside your super fund.
Let me explain why…. on average an investment property yields or pays in rent around 3-4% each year. Every year hopefully you can raise the rental to keep pace with inflation.
The problem starts to occur after 65 years of age when your property pays you say 4% but you are required to draw out of your super fund 5%. Where will you get the extra cash? As you can start to see, this starts to be a real problem if this is the only asset class you hold in super?
Unlike other asset classes, with property you can’t sell off a chunk of the holding. It would be really great to sell off a window to fund the difference, but the reality is this can’t be done. The only way to fund the every increasing shortfall is to sell the whole property. So how do you avoid this problem?
Well the easiest solution is to ensure that you hold a range of asset classes in your SMSF such as property, shares, cash and term deposits. This allows you to liquidate other components of your portfolio such as shares, cash or term deposits to assist in funding these minimum pension requirements. It also allows you to hold a range of asset classes which pay sometimes higher income levels thus providing a more comprehensive approach to retirement.
So like my 2 young boys who are the best of buddies most of the time but sometimes their greatest enemies, if your super fund is a sole child and just holds property you may need to expand it’s friend group and look to incorporate some other asset classes into your super fund.
Like all great ideas it is important to get some qualified financial planning advice before you run off and implement any of the information above. So be sure to speak to one of our qualified and friendly financial planners at AJ Financial Planning or visit www.ajfp.com.au.