Some people hanker for a sea change, others a tree change, but Richard and Alison Evans are going for a snow change.
Richard is retiring as a primary-school teacher in 18 months and the couple will move from Dapto on the NSW south coast to Jindabyne in the Snowy Mountains to set up a bed and breakfast. Alison, a home lender at IMB, plans to start a mortgage-broking business there as well.
Richard has calculated they will have about $48,000 in a bonus, plus $50,000 (before tax) of a long-service leave payout and will have an indexed pension from his super paying $2200 a fortnight plus Alison's super of $132,000. There's a $260,000 mortgage on their Dapto home, which is worth about $340,000. The couple have about $80,000 in other loans.
Richard estimates the B&B would cost $600,000 ''at most'', including a separate small flat to let. Together, the B&B and unit would ''just about cover repayments''. They also plan to trade in their car for a new one of about $35,000, and would like to travel a little in their retirement.
Richard asks: ''Are our plans feasible? How should we use the bonus, long-service leave, my wife's super payments and my super?''
BFG Financial Services
Although the B&B and tenant income is expected to just about cover the loan payments, additional income might be needed from either the mortgage-broking business or Richard's superannuation pension for loan repayments to ensure the loan can be repaid by retirement.
Assuming the Dapto property is sold, the proceeds should be used to repay the home loan and other loans.
To fund the B&B purchase, a loan will be required. Given how variable business income can be, Richard and Alison should borrow the maximum amount possible for the B&B loan because it is harder to increase the loan should any problems with cash flow occur.
To provide some cash for repayments should one of the income sources not meet the amount projected in the budget, place available cash from the bonus, long-service leave and Alison's superannuation (if able to withdraw tax-free) in an offset account against the loan.
In summary, the plans are risky due to the fact that two new business ventures are being established that will require a considerable loan.
It is worth doing a number of ''what if'' tests?
For example, what if the expected occupancy of the B&B is lower than budgeted? What if we are unwell and cannot run the B&B for a short or long term? What if tenants don't pay their rent? How do we meet repayments and provide for our living expenses?
To be honest, I'm having trouble seeing the risk-reward mix of your strategy providing a real benefit.
In a best case, the lender might treat the B&B purchase as a home loan rather than a business loan. If this is the situation, you are going to have to put about 25 per cent of the purchase price down as a deposit and to cover costs. This means you will need $150,000, and unless you use Alison's super, I can't see where the funds would come from. Superannuation can be accessed by individuals over 55 provided they are permanently retired from the workforce, but from what you are suggesting, this is not the case.
I understand you are in a bit of a debt hole, but given that you both seem keen to continue working, it would make more sense to me if you used the pension income (tax-free after age 60) to supplement other income and rapidly reduce your debt. Salary sacrificing back into super might make sense from a tax perspective, and allow you to repay your loan more efficiently.
This does not exclude a move to Jindabyne, but you might consider renting out your Dapto property and then renting in the Snowies for a year or two. I always recommend a ''try before you buy'' approach when making significant lifestyle changes.
I have a core rule that you should own outright the roof over your head before you retire, and then focus on your retirement income. The income seems sorted, but the focus between now and when you want to stop working (or have to) needs to be on owning your home - wherever it is.
The snow change could well become a reality given your reasonably strong financial position and the security of Richard's indexed pension of $57,200 a year.
You will have $80,000 equity in your family home after repaying your mortgage loan, or about $65,000 after sale transaction costs. Use this $65,000 together with some of your cash savings to pay off your $80,000 in ''other loans'', which presumably are not tax-deductible and therefore not tax effective to retain.
You should have about $83,000 in cash savings, less any tax payable on Richard's long-service leave. Up to $35,000 of this is earmarked for a new car and the remaining $48,000 could be used for your new businesses or as a cash reserve.
When Alison retires or otherwise becomes eligible, she could start a pension paid from her accumulated super benefits.
Meanwhile, she should try to build up her super by maximising her tax-deductible contributions.
Initially, this can be difficult due to constrained cash flow, but remind yourself of the long-term pension income benefits. Richard's indexed pension does provide peace of mind. but check how much of it will revert to Alison if he dies before her.
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