Itchy feet ... Peta Lee, a graphic designer, wonders whether downsizing her home will help fund her travel plans. Photo: Jacky Ghossein
Life's good for Peta Lee, who says she has ''a lovely house, good equity in it and a good job''.
So why would she be interested in a money makeover? Because Peta and husband William Bowden have a $700,000 mortgage on their home worth about $1.6 million. It boasts a granny flat and is in a prime location in Sydney's inner west.
It also turns out they don't have much super - about $60,000 each - but want to retire in 13 years when both turn 60.
Peta runs a thriving graphic design business that employs four others. She got her start designing business cards 20 years ago. She jokes: ''If I could retire tomorrow, I'd push all my equipment out with a sign saying, 'Free to a good home.'''
Will is a mastering engineer in music; in fact, he just won a Grammy Award for record of the year with Gotye.
Peta and Will love travelling and are pondering retiring to France.
As Peta says, ''We could buy a house there one day but the trouble is what would you then live on? But I don't think we can afford to retire in Australia when we want to travel a lot.''
Peta wants to know whether they should sell their home and buy something cheaper further out or in the country.
''We aren't sure that will put us in a better position in 10 years. Should we persevere with the interest payments on the $700,000 until we pay it off, and retire at 60?''
PAUL MORAN, Moran Howlett Financial Planning
You haven't mentioned what income you would need to retire in 13 years, an important ingredient that allows financial planners to calculate how much you might need to have in super before you stop working.
Given your relatively low balances in super, and the fact that you have a goal of retiring seven years before you might qualify for an age pension, your super balances in the future will be vital. Your combined super might grow to about $500,000 (in today's dollars) between now and age 60, which is enough to provide you with a sustainable annual income of about $25,000. I assume this is not really enough for you and highlights the importance of increasing your contributions. With a maximum of only $25,000 each a year, you are going to need some quality advice to maximize this potential.
Another concern I have is the size of your mortgage. I'm not interested in how much equity you have in your home; what is important is how to become debt-free before retirement. With current interest rates, you will need to make monthly payments of about $6500 a month to clear this debt. If this is not possible, you might need to look at downsizing or moving further out in future.
If you want to retire in France, consider renting a property for three months - the maximum length of time you can stay on a standard visa - to see how you go before making any long-term commitment. You could even rent out your place to help cover the costs.
SUZANNE HADDAN, BFG Financial Services
Remaining in your current home has the advantage that any growth is tax-free; however, the disadvantages include the risk of relying on one asset for growth and the lack of rental income.
Making a lifestyle sacrifice, such as selling a lovely house in a great location, is usually beneficial financially. Selling the existing property and buying a cheaper house should be a good financial decision because you could be mortgage-free. Then you can look at other wealth-accumulation strategies such as salary sacrificing to superannuation and possibly negative gearing. Salary sacrificing to superannuation is more tax-effective than paying off a home loan. This is because salary sacrificing to superannuation gives a tax saving upfront.
For example, to pay $100 off the home loan, you would need to have earned about $163 before tax. Had that same $163 been salary sacrificed to superannuation the tax payable would be 15 per cent, leaving $138 to invest. This is a massive additional investment amount of 38 per cent.
Depending on your tolerance for risk, consider negative gearing into property or shares if you change over your home and became mortgage-free. Negative gearing means that the cost of borrowing, which is mainly the interest on the loan, exceeds the income from the investments.
It is a high-risk strategy that works best when you are on a high-tax bracket because you claim the loss and receive a tax refund based on your tax rate. The higher your tax rate, the higher the refund. However, it is important that the property or shares grow; otherwise, no profit will be made and the strategy has been a waste of time and money.
TONY HARRIS, Firstfolio
It sounds as though you are getting itchy feet and would like to travel, but the fat mortgage is the worry. Peta loves the house but probably doesn't need the space.
The real question is whether the equity in your home is going to appreciate at a faster rate than putting it into other investments such as equities, bonds or cash and if more can be contributed to their super funds to work better in that environment.
Your super accounts are quite low for your age at 47.
The debt is costing about 6 per cent after tax. If you try to pay off the remaining debt in 13 years at a 6 per cent interest rate, this will cost about $6473 a month or a total of $1,009,798, including $309,798 in interest.
My suggestion is sell now and buy a smaller property in Sydney or in the country if work allows you to do that, with maybe no debt or a very small mortgage. You can then invest the maximum allowable into super.
Selling the house now makes money available to travel, which is something you love doing.
You can always decide between now and retirement if you should keep your Australian house, continue to travel with your healthy super fund paying an allocated pension, or sell up and buy your dream house in France.
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