Asset rich, cash poor and proper advice that’s value for money
Peter Switzer is an Australian business and financial commentator, radio and television presenter, lecturer and author.
In his latest article he talks about the best advice he’d received which was, “Work out what you want. Find out the price. Pay the price.” This was not to be the only time such a valuable message was able to be applied to real life. He writes…
I was the editor of a business magazine in the 1990s and this advice came back to me when I sat in a meeting with one of my financial advisers and a potential client who was asset rich, but cash poor.
The client was in her 60s, divorced and had worked her whole life but had copped a bit of bad luck. But her old fashioned low spending meant she retained a home that, over 30 years, had crept up in value to about $2 million!
This is a lady that young people are cranky about because she’s living in a house they want to buy! Luckily for those lucky young people who can afford it, she wants to head to the country to realise the capital gain and use the proceeds of the sale to hopefully build up her super, so she’ll be protected from having to watch every dollar or debilitating sickness as she ages.
Despite her humble lifestyle and keeping her house, she only had $100,000 in super and was on the pension. This wasn’t someone who’d lived the life of Reilly but she was now wise enough to look for help before something went wrong. Sure her asset (her house) would provide a great backstop if anything went wrong and she needed money for say, aged care. But who wants to sell a valuable asset in a panic, driven by a life crisis?
The answer should be no one. But many people are in situations like that because they haven’t planned for a possibly unexpected future. Another piece of great advice I’ve picked up from my business days is that people don’t plan to fail; they simply fail to plan!
As my colleague and I encouraged her to put her ‘money life on the lawn’ for us to examine, it was clear that her best route was to sell her house in an improving house price market and take up her second option to head to the country where she could buy a place and have sufficient left over to retire on comfortably.
The next step was to get as much as she could into super.
And that’s where knowing the rules can make a big difference.
An array of questions showed the possibilities to boost annual returns and reduce tax. For example, if our retired client could work part-time, she could get $125,000 a year into super until she’s 75. That would mean 6 x $125,000 = $750,000 into super that might otherwise have stayed outside of super to be taxed at the top rate! But what about the funds she might have had leftover from the sale of her house?
That’s when my colleague’s knowledge of the super rules showed the value of expert help.
He pointed out that a law change meant that if someone was over 65 years and was selling a home to downsize to get money for retirement purposes, they could do a one-off $300,000 contribution to super!
That meant only the earnings on the $250,000 left over for treatment by the Tax Act. But who knows, we might advise her to use part of that to build a granny flat on the back of her new country property and put it on Airbnb effectively creating a part-time business. The more money in the future the merrier, I say.
Well, that might be beyond our conventional plan but we could look at an insurance bond that could be socked away for 10 years. And that would then deliver a nice return with zero tax to pay! This could be a bonus if our client wanted to have money for aged care or to help family.
The power of knowledge!
The banking royal commission showed us that some financial advisers have tarnished the reputation of a group of professionals who can be enormously helpful to taxpayers who have worked hard and deserve to have a great retirement.
I’m not defending questionable practices but the financial advice industry got sneakier because too many consumers don’t like paying for proper advice to make and save them money. It’s false economy in many cases and sometimes you need advice shaped to your personal circumstances in order to build wealth effectively.
Not all people need advice but a lot do.
Ann Landers wisely observed, “Too many people today know the price of everything and the value of nothing.” And Warren Buffett advised, “Price is what you pay. Value is what you get.”
Anyone can replace an adviser’s help with copious reading to arm themselves, so it is doable. If you can’t, think about another Buffett conclusion on life, “It’s better to hang out with people better than you…”
If I want to get fit, I hang out with fit people. If I want to learn to play golf, paying a golfing pro for lessons would make sense. If I want to grow wealth, investing in guidance from a specialist seems sensible.