There’s been an awful lot of err…less than favourable commentary…around negative gearing of late.
Of course a lot of the controversy was (either consciously or sub-consciously – who can say?) stirred up at a point when a number of concerned parties (each with their own agendas), were making noise about housing bubbles and affordability issues, allegedly driven by a property investment boom of sorts.
But negative gearing is not an evil villain. In fact the capacity to leverage into a stable, wealth producing asset like bricks and mortar, has made it possible for many mum and dad investors to reclaim control of their retirement funds.
When accumulating investment properties, negative gearing provides working investors with the potential to reduce their income tax exposure, thereby harnessing optimal cashflow with which to sustain a growing portfolio and all of its associated costs, like mortgage repayments.
However, negative gearing does become less effective as your marginal tax rate starts to decline.
So for those heading into retirement, it’s essential to plan ahead when it comes to easing the debt burden over your asset base, in order to successfully create a sufficient income stream for your post-work needs.
Winding down your debt
Whilst in the midst of a highflying investment career, negative gearing is a very smart strategy to employ when approached in the right way and with the right finance structures in place.
But as with life itself, there comes a time when the foundations have been laid, the financial house has been built and now is the time to move into your retirement portfolio and relax – metaphorically speaking.
Ideally, you probably want to call full time work quits and head into the office two or three days a week once you hit the big 6-0 milestone, with a view to being a permanent man or lady of leisure from 65 onwards.
Servicing property related loans and other investment expenses will obviously become less plausible as you reduce your working commitments and in turn, your income.
Hence, you need to shift gears gradually as you ready yourself for retirement, progressively reducing your debt exposure down to zero, in an ideal world. Because the last thing you want to bequeath to your loved ones is a massive financial burden.
A super idea?
Currently, Australian retirees enjoy the possibility of exceptionally low tax rates in retirement, via generous legislation governing super funds in pension phase.
As such, a possible strategy for investors heading into their fifties and sixties is to pull back on leveraging into additional real estate, in favour of perhaps offloading a few property holdings and contributing the profits to your Super.
Using the ‘bring forward’ provisions for after tax (non-concessional) contributions for instance, allows you to inject an extra $720,000 into your fund over two years as an individual, or a hefty $1.44 million for couples.
By rights, you could sell off a property or two at the age of say, 55 and deposit the proceeds directly into your Super in the following way:
- By June 30 – make an after tax contribution of $180,000 for this financial year.
- In July – contribute another $540,000 to your fund using the ‘bring forward’ clause for the 2016, 2017 and 2018 financial years.
No further contributions, aside from the legally required 9.5 per cent employer one of course, are allowed again until the fourth year, when you could consider doing the same thing again at the age of fifty-nine.
This is just one approach to a successful portfolio transition from asset and gearing accumulation, to gearing reduction and income generation.
You might also consider things like adding a neutrally geared property investment to your SMSF, where you can enjoy the benefits of an income producing real estate asset in a low tax environment.
Or selling off surplus property or other investments to reduce your gearing to a more manageable, cashflow neutral or preferably, positive position as you wind down work and approach full retirement.
Seek counsel
As with all things financial planning, there’s no real one-size approach to shifting gears as you approach your golden years.
One thing every smart investor would be well advised to do, is seek the guidance of a suitably qualified and experienced professional when it comes to this particular stage of your wealth creation journey.
The road can get rocky here if not approached with caution and traversed with care, or it can lead to a very lucrative pot of gold at the end of your very own retirement rainbow!
Let sound future financial modelling be your guide!
If you would like to speak to an industry professional for advice on how to plan today’s optimal finance structure, in order to meet tomorrow’s investment objectives, please click here now to connect with a member of the Trilogy team.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).