I refer to your recent article concerning the difficulty facing retirees as interest rates fall. Why would you not recommend property? It is still not hard to find a 6.5 per cent yield, let's say 5 per cent after expenses, probably less risky than shares and your capital base should appreciate with inflation or better.
The problem with property for retirees is increasing maintenance, as the property ages, and vacancies if it is hard to find a tenant. Also, the biggest disadvantage is that property is a lumpy asset and if you need money you would normally have to sell the entire property, which may take months. Also you would incur capital gains tax if it has grown in value. A good share portfolio has none of these disadvantages as you are never liable for direct expenses, vacancies are non-existent, and you can sell a portion of your holding at short notice. The ability to sell in small parcels enables retirees in many cases to eliminate capital gains tax or at least minimise it. If you own a property, you can't sell the back bedroom.
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Would you recommend dividend reinvestment? I am 55, do not need the dividends to live on and am just buying shares with them.
It's something I practise myself – and I think essential if the money is going to a person in their own name. Most people are not disciplined like you, and the money they receive from dividends tends to be mixed up with other personal money and get frittered away. However, if the shares are in a self-managed super fund it's not such a big issue because the money from the dividends will be held in the fund's bank account where they can be directed to any investment you deem appropriate.
You have long been advising investment bonds as a great investment for grandchildren. I have done it with One Path for my granddaughter who will be turning 18 in November. She will be going to uni and won't be needing the money now. I would like to give her the money when she turns 21. Could you please advise me on what I should do with it until then?
The great thing about insurance bonds is you can keep them as long as you wish, then transfer them free of capital gains tax when you feel it is appropriate. Also, due to the way compound interest works, the best returns come at the end of the investment cycle, because this is when the largest sum of capital is working. I suggest you continue to hold them and transfer them at the appropriate time.
Does income earned within an investment bond count as income for child support purposes?
Child support is based on taxable income, therefore as long as funds remain invested in the structure of an investment bond, they are not regarded as assessable income and should have no effect on child support payments.
I have received multiple responses to my situation and would appreciate your opinion. I have a $3 million mortgage and have about $2 million in my offset account. Earlier this year I used $1 million from my offset account to buy a share portfolio. I understood that the interest I'd have pay as a result of the money not being in my offset account would be tax-deductible since the money was withdrawn for investment purposes.
An offset account is tantamount to a savings account with the interest being deducted from the interest on your loan, instead of being paid to you as taxable income. In this case you have simply withdrawn the money from the account and used it to buy shares, so you cannot claim interest as no loan is involved. As a result you have a large non-deductible debt on your residence, while paying full tax on the share dividends. I suggest you talk to your accountant about selling the shares, using the proceeds to reduce the non-deductible debt, then borrowing to buy shares using a home equity loan. The interest on this new loan should be tax-deductible as the purpose of it is to buy income-producing assets.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: noel@noelwhittaker.com.au