Education the key to planning your financial future

BAREFOOT Investor Scott Pape answers readers’ questions about superannuation, retirement, savings and all things financial.

Scott Pape offers advice to retirees on how to invest their super.

Q I’ve just retired at the age of 70 with $100,000 in super. My wife works part-time and she has $12,000 in super. I receive the aged pension, so our joint income is about $650 a week. We own our house outright, drive a modest fairly new car and have no credit card debt. We have about $14,000 sitting idly in a basic bank account, which I’m sure you’ll cringe at. I’m worried about committing to the share market and how it would affect my pension. Please advise.

Tom

A

Your pension won’t be affected whether you invest in the share market or leave it in the bank — Centrelink treats it the same. Still, I’d prefer you use your existing superannuation money to invest in the share market. Leave the $14,000 for emergencies, but move it into a high-interest online savings account.

A bigger risk to your pension payment will arise if you don’t convert your super into a private pension by the end of the year, when Centrelink rules are due to change. As long as you draw the minimum income from your account-based pension (5 per cent), Centrelink will not count it towards the income test, which means you’ll likely get a higher rate of age pension. There’s a bit in this — check with a Centrelink Financial Information Services Officer (FISO).

BUILD DISCIPLINE

Q

Your recent piece on rent vs. buy makes some sound points, but as a 27-year-old earning good coin of about $100K a year and trying to save for a deposit, it’s almost the equivalent of an earthquake. I have no debt apart from $20K HECS. I have $21K in my Mojo account and own my own car. Should I pay off my HECS and start a low-risk share portfolio, or am I missing the point?

Stanley

A

Why not have both? Here’s my five-year challenge to you: I want you to save at least $200,000.

Let’s do the maths. Your current annual take-home pay is $67,000. (About $8000 will go to your HECS — though it will be gone in 2 ½ years , so don’t pay off extra.)

Live on $650 a week ($33,800). Invest $10,000 a year into shares, starting off with Argo Investments and, as your confidence grows, build a share portfolio. Save the balance in a high-interest online savings account.

You’ll also hopefully score some pay rises within that time. Bank them too. Five years from today, you’ll have a share portfolio worth $60,000. You’ll also have $150,000 for a home deposit. The real pay-off, though, is ahead of you: you’ll have developed a savings discipline that will have you debt-free in your 40s, and a millionaire in

your 50s.

GOLDEN YEARS

Q Despite my age, I am still trying to find my way around finance and investments and I find your newsletters and comments very informative. I’m turning 63 in August and recently came out of a 29-year marriage. I currently live on my own in a two-bedroom townhouse.

I recently bought a parcel of land 20 mins from Brisbane CBD, and plan on building my dream home (a $1 million four-bedroom house and land) and live in it for as long as I can. However, I am now having second thoughts. Considering I am on my own (no children), do you think I am making the right decision?

Marilen

A

It depends on how you did in the divorce, how much you earn, and how long you plan to work.

However, if you’re spending every last cent building your dream home, that’s a really bad idea.

Remember, if you build a four-bedroom McMansion, it’s not just the upfront cost, you’ve also got to heat and cool it and clean it ——and all on one income. You’ve also got to fund your retirement — and having a million bucks tied up in your home won’t help you do that. I’d buy a townhouse for $600,000 and invest the difference in good-quality dividend-paying shares.

Originally published as Education the key to planning your financial future