Q&As
- Young couple take a break from work.
- Some other options for the couple in the column two weeks ago.
QOne investment area that you did not consider in your advice to the young couple “taking a break” was investing in themselves.
My partner and I were in a similar position two years ago. We used our savings to fund post-graduate educations, travel and pursue “dreams”, many of which might have been physically impossible during a traditional retirement.
While materially we are now behind our peers (our house needs decorating, our cars have aged and our savings are diminished), we’ve gained a wealth that cannot easily be measured in dollars.
We were also delighted to find our self investment produced a handsome dividend — our son, with whom we’ve both had the luxury of spending “quality time”.
For anyone else contemplating breaking away from the protestant work ethic, we’d heartily recommend management guru Charles Handy’s book “The elephant and the flea”.
As the saying goes “who ever died wishing they’d spent more time in the office?”
AIn all these years, I never realised that was what it takes to produce a baby!
Seriously, though, the young couple who wrote a couple of weeks ago were asking about investing their savings before they took their break. You’re talking about what to do during the break.
Still, you make a good point. People taking a break can use the time for activities that will make them richer — perhaps financially, perhaps in other ways — for the rest of their life.
Houses and cars can wait. Savings? Well, if you’ve got your act together well enough to fund a break while you’re young, I’m sure you’ll also be able to accumulate retirement savings later on.
QLike your second correspondent two weeks ago, I sometimes question your advice.
While I am not a financial expert or a journalist or rich, I do have two rental properties and an accountant and would have said something different to your first correspondent, (who was living in a house she had built behind her original house and was renting out the original one).
I would have said to see if you can transfer the mortgage to the house you rent rather than the house you live in (then claim all expenses including interest and depreciation against your personal tax).
Also explore all options to pay off the mortgage by retirement (fix at lowest possible rate, two-weekly repayments etc).
Postpone the car until the second house is no longer costing you if you can. Otherwise do what Mary says.
Don’t assume that you will necessarily sell the house at retirement. You might find that national superannuation and rent (provided you are mortgage-free) provide as good a retirement income as bonds (beware of commissions and other charges), while you retain your assets for as long as you can.
AIt all sounds reasonable, but I have lots of “buts”.
You and I both assume the woman can’t deduct the interest on her mortgage. That’s because — regardless of which house is used as security — she probably raised the mortgage to build the new house, in which she lives.
This is true even though the object of the whole exercise was to end up with a rental property. It’s not really fair, but it’s the law.
Unfortunately, the woman can’t just transfer the mortgage to the rental property to pick up the interest deduction.
She would have to set up a loss attributing qualifying company, or LAQC. The company would probably then raise a mortgage to buy the house from her — although there are other ways of doing it.
The result: The existing loan would be replaced with a loan for investment purposes, which would be deductible.
I thought about suggesting this to the woman. But, given that she is only in the 21 per cent tax bracket and LAQCs are far from simple — with considerable set-up and ongoing costs, rules and reporting requirements, and scrutiny from Inland Revenue — it didn’t seem a good idea.
The woman might end up spending more on accountants than she gains from the deduction.
Still, I acknowledge that I could have mentioned the idea as something for her to explore. It’s just that I strongly agree with the famous quote from McDonald’s founder Ray Kroc: “Keep it simple, stupid!”
You also write about claiming depreciation and other expenses of the rental house. They are always deductible, regardless of the mortgage situation, and I’m sure the woman is already deducting them.
How about paying off the mortgage by retirement? I did urge her to reduce her mortgage as much as possible while she’s still working.
But getting rid of $173,000, plus many thousands of dollars of interest, in nine years, when your income is $37,000? Have a heart!
The woman has done well to get where she is. Let’s not make her feel inadequate because she can’t reach an unattainable goal.
What about the car replacement? Her car is already nine years old. Even if she performed a miracle and paid off the mortgage over the next nine years, if she put off replacing her car until then it would be getting pretty old.
With a net worth of around $380,000, why should she have to drive an 18-year-old car?
Finally, you’re quite right that she doesn’t need to sell the rental when she retires. But it will probably be her best move.
You say, “provided you are mortgage-free”, and as I’ve said she almost certainly won’t be.
But even if the house were mortgage-free, the woman would still have all her retirement savings tied up in the property.
Sure she’d get the rent, and it might be more than the interest on bonds — although the expenses of a rental are much higher than any “commissions and other charges” on bonds, so the rent would probably be lower after costs.
But the big difference is that, with bonds, she could also gradually sell them, boosting her income considerably.
She would die with less, but so what?
Sorry if I’ve been rather negative about your ideas, all of which are worth considering. I do appreciate getting alternative views, and I’m sure readers do too.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.