Question 1: Hello, I am 53 years old and working full time to earn $100,000, and my wife is 51 to work part time and earning $47,000.

We live in a house valued at $2.6 million and we owe the bank $1 million with an interest rate of 2.69%. We have $1 million in the bank in a clearing account, so we don’t pay any interest.

We also have two investment properties. The first is valued at $1.1 million with a mortgage of $165,000 and the second is valued at $1.4 million with a mortgage of $365,000.

My super balance is $355,000 and my wife’s super is $135,000. We have two children, one is 25 and works full time and the other is 18 and does his HSC.

Going forward, where can we put the million dollars in our clearing account to good use? Should we buy another investment property, or what?

First of all, congratulations on your savings and investments. You appear to have a strong balance sheet and are heading for a stable financial future.

Currently, you are heavily invested in real estate as an overall percentage of your investments, with $2.6 million in your main home and an additional $2.5 million in investment properties, and you have less than $500,000 in super combos.

Many residential properties have performed very well recently, but the following factors should be considered:

  • With most economists predicting interest rate hikes, future gains less certain
  • Real estate is considered a ‘growth’ asset and its spectrum of risk and reward is higher than many people think
  • The property is illiquid. Do you have access to other funds outside of the property or super in case of emergency?
  • The property is also not divisible – you must sell an entire property to access your funds
  • The main problem I see for you is diversification. What if property prices fall and you have 80% or more of your funds in that single asset class?
  • I’m not saying prices will go down, but you’re adding unnecessary risk to your portfolio by having so much in one asset class. Property can do a lot in the future and you can make big gains, but you have to recognize that you are adopting a high risk, high reward strategy.

I would suggest the following approach:

  • Make sure you have enough funds available to cover short-term planned and unforeseen expenses. This would be in bank accounts, term deposits and online savings accounts
  • Then consider a diversified managed fund or ETF that offers investments in a wide range of asset classes, such as Australian and overseas equities, bonds, infrastructure and commercial property.
  • Look to boost your Super Sale. Once you are sure you have enough funds for short-term use, super is a very tax-efficient vehicle to invest in and a great place to choose from a selection of diversified investments. Remember that you can only access these funds in retirement.

Finally, to tie it all together, I suggest you set financial goals.

When do you want to retire? How much income do you want to live on in retirement? How much money will you need to generate this income and leave a buffer? You wanted to provide financially for the needs of your children or charities and leave a large estate?

Talking to a knowledgeable and qualified financial planner can help you formulate and achieve your goals, which is especially important during the pre-retirement period.

Question 2: Hi Craig, I own a home worth approximately $400,000 when I die. What’s happening to him ? Should I give it to my children now?

I was thinking of giving it to them now (signing it). I heard or read that if I die, the government takes it and then settles with the children? Is it true?

First, I strongly recommend that you have a will in place.

Some people don’t make it and some people think they don’t have enough assets to care.

But not having a will can lead to a lot of paperwork and messy, expensive litigation for your beneficiaries.

If you die without a will – this is called ‘ab intestate’ death – then someone (your children or your partner if you have one) will need to apply for a grant of letters of administration to sort out your goods.

Your assets would then be distributed according to a set formula, which differs slightly between each state and territory.

Generally, the funds go to your spouse and then to your children up to certain amounts. But if you have children from a previous relationship and/or other financial dependents, that can complicate things.

In your will, you can stipulate where you want the proceeds of the property to go after your death.

Or, as you indicated, you have the option of giving it to your children now.

If you go this route, be aware that:

  • There may be transfer fees involved
  • If you are receiving benefits from Centrelink, such as Old Age Pension, the donation of more than $10,000 would be treated as a private asset and would fall under Centrelink’s asset test and would be considered an income test.
  • If you want to continue using the property yourself, make sure you have a signed agreement in place that helps avoid any future disputes.

Whichever option above you pursue, I recommend that you seek legal advice.

Craig Sankey is a Certified Financial Advisor and Head of Technical Services and Advisory Enablement at Industry Fund Services

Warning: The answers provided are of a general nature and although inspired by the questions asked, they have been prepared without taking into account all of your objectives, your financial situation or your needs.

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