My wife and I (both early 50’s) have $350K in combined super, own our house mortgage-free and have a holiday house we rarely use, worth about $650k. Should we sell the holiday home and use the proceeds to top up super and invest the balance elsewhere? We’d like to help our son buy a house in the next 5-10 years but also retire/semi-retire at around 60 years old.
Steven, Batemans Bay, NSW
Top answer provided by:
Pedro Marin Ramirez
Appreciate your question as this scenario is quite common in Australia, so hopefully, my answer can provide guidance to you and others.
(Please be aware that my answer is general in kind and that you should seek tailored financial advice before heading in any direction as I have made several assumptions which may be not be accurate in your case).
There are a few variables in your case I would like you to consider:
- Liquidity risk
- Concentration risk
- Legislative risk; and
- Tax implications
I believe that superannuation is one of the most tax-efficient investment vehicles to grow assets in Australia but there are some caveats that we need to take into consideration.
In your case, if you were to sell your investment home and maximise your contributions to super (you both may be able to put up to $300,000 each into super depending on your contribution history – I’ll explain further down my answer), however, you need to be aware that these funds will be locked inside the superannuation system until you (each) have reached what legislation calls a ‘condition of release’, as there are conditions that you need to meet before those funds are accessible to you. Please click on the link to know what are these conditions are: Conditions of Release
Why is this important? because if you need funds due to an emergency before you reach one of these conditions (e.g. you may lose your job or you may want to help your son earlier than expected), your money is locked, and your liquidity is at risk. Also, this can be the case if you keep your holiday home, as you are not able to sell just a door or a window of this asset to meet your financial commitments, and liquidity may be compromised as well.
Imagine that the above information has put you off selling your holiday home and subsequently contributing the proceeds into super, just until you are certain that you can access these funds.
The issue with this approach is that a considerable sum of your wealth is now concentrated into the one asset (property), and this exposes you to considerable concentration risk. How? Well, imagine that the value of this holiday home decreases for some reason, your retirement outcome will be directly impacted as you may be intending to use the value of this home to fund a big portion of your retirement.
You may have heard of the word diversification, and I personally believe this concept to be crucial for the long-term effect of an individual’s retirement outcome. Effectively, you need assets that may go up in value when others are going down or at the very least, hold their value while producing income. This approach helps you seek out investment opportunities and the classic phrase ‘don’t put all your eggs in one basket’ comes to place. Superannuation in this instance can provide you with a large range of asset diversification and therefore you’re back to square one, should I put the proceeds into super?
Now imagine that after reading the above, you now change your mind again and are inclined to sell the home and diversify your funds by investing through the superannuation system (and you are willing to accept the liquidity risk that this entails).
This now brings us to another risk, ‘what is the likeliness of you being able to put up to $300,000 (each) into super using a legislative piece called ‘bring-forward rule’ in the future?’. You might be able to do it this year, but next year? Or the year after that? Who knows, and therefore you are exposed to not being able to do this in the long term as laws may change over time.
I have included below a link that will guide you regarding current contribution limits, so you are aware of what are your current options. The likeliness of these laws changing in the short term is minimal, but not for the long term (e.g. 10 years from now).
Lastly, if you decide to sell your holiday home at a time where you have considerable capital gains and you both are on high incomes, this can be detrimental to your long term retirement outcome as the net proceeds from the sale may be significantly less due to the tax liability (and depending on who owns the holiday home as well).
Therefore, I would consider the ‘when to sell your home’ with not just an economic approach (how the property market is performing at the time), but also from a tax perspective. For example, if you decide to wait until one or both of you are no longer working (to then sell your holiday home) your tax liability may decrease in that instance and maximise your retirement outcome.
Steven, I would highly recommend that you attain financial advice by a professional as there are many opportunities that you may not be aware of, in order to maximise your retirement outcome, mitigate risks, and to ensure that you do not breach any contribution limits as a result.
Hopefully, the information I have provided here explained what to look out for, or at the very least, encouraged you to have a conversation with your/a trusted adviser of choice regarding the abovementioned points.
Pedro Marin Ramirez CFP®
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