The Death Cult Date

Scott,

I am reading a lot about an imminent crash on the US stock market dated to occur on 28 May due to the debt level of the US economy. As a self-funded retiree, you can imagine my concern. Is there anything I should do? I am considering moving my money from its current investment strategies in my superannuation fund to cash. The 2008 crash cost me 40 percent of my investment.

Reg

Hi Reg,

Sorry I didn’t get back to you earlier I was busy in my bunker, stacking baked beans and ‘doomsday prepping’ for the global financial meltdown of 28th of MayWhich was (strangely) a Saturday, when the the market was closed. But if we take a slightly wider view, say Friday to Monday, the market rose 0.3 per cent. What a ride!

Legendary billionaire investor Charlie Munger explains it this way: “People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.”

Seriously, if you trace back the doom and gloom headlines, they almost always lead to a sales page on the interwebs to purchase an investment newsletter. Fear is a fantastic marketing tool, and the more they scare people, they more they shell out. Unsubscribe from this rubbish.

Scott

The Forty Thousand Dollar Phone Call

“NOW it’s mortgage brokers facing digital disruption in the third wave of property finance.”

I read that headline earlier this week in much the same way that my three-year-old reads his bedtime stories.

By guessing.

“Mortgage brokers facing digital disruption” … hmmm, OK, so maybe it’s like Uber for home loans?

“The third wave of property finance” … OK, nope. I have absolutely no freaking idea what that means.

But it’s my job to understand, so I kept reading.

Turns out the article was about a new mortgage broking app called Uno, which allows the public to broker their own deals.

It’s the creation of a clever bloke named Vincent Turner, who, some years ago, actually developed the software that 90 per cent of Australia’s banks and brokers use.

Interesting.

Now he’s turning the tables on the industry by “providing home loan customers with the same screens that are used by mortgage brokers”.

“We are establishing the third major wave in the property finance industry: consumer-brokered home loans.”

Ahh, so that’s where the third wave analogy comes from.

“At Uno, we don’t like to think of ourselves as a mortgage broker. We don’t have a sales commission structure.”

Very interesting.

After all, the $1.3 trillion home loan market does need a bloody good shake-up.

About half of all home loans are set up through mortgage brokers.

The banks pay them a collective $2 billion a year in upfront commissions, as well as ongoing kickbacks for the life of the loan (which is why some brokers sign you up to a three-year fixed loan — it also fixes in their commissions).

The government is worried that conflicted commissions result in bad advice.

After all, under the commission structure, the more you borrow the more they make.

So I called Vince at Uno, to talk about the “third wave mortgage revolution”.

He had his pitch face on: “Look at any other vertical: real estate, jobs, cars … there’s been a disruptive, revolutionary platform that consumers embraced.

“ That hasn’t happened with mortgage brokers. The home loan market is ripe for disruption … and we intend to own that category.

“Once consumers understand that they’re getting a better outcome, you don’t need to advertise. People just flock to it.”

Flocking hell.

It all sounded very “fintech” to me. Very “our office has a ping pong table and the blokes who work here have beards and wear long pants without socks”.

When it comes to finance, you need to bypass the buzzwords and follow the money.

Barefoot: “So, what happens to all the kickbacks the banks pay you for lining up loans, cobber?”

Vince: “All the money goes back into the platform … to enhance the user experience.”

Barefoot: “What does that even mean? Oh! You’re trousering the commission’s, right?”

Vince: “Well, yes.”

Barefoot: “Dude, you’re about as revolutionary to the mortgage market as the Kia Rio is to the luxury car market.”

And there you have it. Strip away the fancy technology and it’s the same old flog.

Yes, I’m grumpy. And, no, my advice doesn’t change.

If you’re getting a new loan, you should look at the smaller, online lenders like UBank, which for years has consistently offered one of the cheapest no-frills loans for people buying with a 20 per cent deposit (and that should be everyone, in my opinion). They don’t pay commissions because they’ve got Aldi-like pricing, 3.74 per cent at the moment.

There are other lenders, that occasionally offer sweet rates to win new business.

If you want to go with one of them, you should go through a cashback broker, who will rebate the trailing commission they receive (but keep the upfront).

Do this over the life of your home loan and it can save you upwards of $40,000.

Here’s the thing: on a $500,000 loan, the banks pay brokers $3500 upfront and around $1500 a year to get your business. And that’s your leverage right there. That’s how much it costs the bank to replace you.

So, if you’re refinancing, the simplest thing you can do is to call your bank and put the hard word on them for a better deal. I’ve been saying this for years — and swear on my little fox terrier’s grave, it works.

Not a week goes by that someone, somewhere, doesn’t email, tweet or Facebook me telling me that they’ve rung their bank, bluffed that they’ve been offered a cheaper rate (usually quoting UBank’s rate) and saved themselves thousands.

Uno you should do it. Go on. And shoot me an email when you get a better deal.

Tread Your Own Path!

Reminder: I first wrote about this years ago and highlighted the low fees. Today there are better bank accounts on offer. How do I know? Because my readers constantly email me about them! So before you do anything, google the best accounts on offer now.

So a Little Old Lady Sent Me a $50 Note...

I opened the handwritten letter and a $50 note fell out.

No, it wasn’t a letter from my grandmother. But it was written by someone’s grandmother.

Truth is, I get a lot of snail-mail from old folks who read my column.

Often they include money to pay me for my time … because they’re old-school, and they don’t expect to get something for nothing (though I always send the money back).

They also do it because they’re afraid and they need some advice.

As you read what happened next, think about an elderly person in your life that you could help.

The Frozen Fund

Barefoot: “Hello! It’s Scott Pape ... the Barefoot Investor... from the newspaper.”

Mrs Jones: “I don’t want to buy anything!”

Barefoot: “Mrs Jones, you are mistaking me for an Indian telephone scammer. You wrote me a letter… about your money.”Mrs Jones: “Oh, yes!”

Seriously, most of my calls to elderly readers begin this way.Along with the $50 note, Mrs Jones (not her real name) sent me a copy of her latest statement from her financial advisor. It showed that she had 38,000 units in the ANZ OnePath Income Trust, with a dollar value of “zero”.

What happened?

She had no idea. That’s why she wrote to me.

It turns out, at the height of the GFC, when the government made the decision to guarantee bank deposits, most income funds, including Mrs Jones’s ANZ fund, were hit with a stampede of investors wanting to get their money out.

So the managers ‘froze’ the fund -- and stopped their investors from taking their money out so they didn’t have to liquidate their fund at firesale prices.

But here’s a key point: while the ANZ fund managers took the drastic, emergency action of freezing their fund ... they did not freeze their fees. Which, according to a spokesperson from the ANZ bank, amounted to 1.75 per cent a year… which includes the trailing commissions paid to the financial planners who put their clients into the fund.

Lock the money up -- slowly drip it out over years -- and continue flogging them with fees … Kerching!

Getting her money back

Now you may be wondering, dear reader, how long these guys can get away with such behaviour.

Well, eight years, and a whole lot of worry later, the last of poor old Mrs Jones’ frozen fund is still … err … thawing.

Drip. Drip. Drip.

I contacted ANZ on Mrs Jones behalf, and was told that the bank “made the decision to stop charging fees on the fund last year”. Which strangely -- coincided with 95 per cent of the fund (eventually) being paid out.

They also assured me that they’d put their best people on “making sure Mrs Jones receives her final 5 per cent, pronto”. (And that -- strangely -- coincided with a phone call from me.)

Mrs Jones and Me

So I called her back:

Barefoot: “Good news, Mrs Jones, I’m told you’ll get the last of your money.”

Mrs Jones: “That’s a relief. I wasn’t sure whether I was right or wrong.”

Barefoot: “Well, you were definitely in the right, and they were definitely in the wrong.”

Mrs Jones: “I knew you’d be able to do it”.

Barefoot: “Why?”

Mrs Jones: “Because you’re from the Mallee, like me!”

Barefoot: “Thanks Mrs Jones … and I’ll be sending you back your $50”.

Mrs Jones: “Well, when you’re next in town, be sure to knock on my door and we’ll have a cup of tea. And I’ll make you some scones”.

Deal!

Tread your own path!

I’m a Financial Leper

Hi Scott,

On holidays recently I went to the reception desk at the hotel and was asked for my credit card. I explained to the guy on duty that we do not have one (being Barefooters, we willingly cut it up and now get by without one). So I had to pay the security deposit for the room in cash. The guy gave me a semi-stern lecture about the importance of having a credit card in the modern world. It made me feel a bit like a ‘financial leper’.

Vince

Hi Vince,

Like you, I don’t have a credit card in my pocket. Unlike you, I see it as a source of pride. It’s the ultimate anti-status symbol. I certainly don’t view myself as a leper -- but a leader. If you’ve got kids, you can bet they’ve noticed (and if they haven’t, tell them: “Dad pays cash”). Finally, as for having to hand over your own cash (which you can easily do via a debit card) to secure a room or a car… well, I think that’s a very first world problem to have.

Scott

Bonding With My Kids

Hi Scott,

In a previous article called ‘Time to Think of the Kids’, you outlined an investment bond strategy which would work well for our two kids, who are four and six. After researching it I'm not sure how to go about investing in bonds. Are you able to point me in the right direction? Also, do you think this is still a sound approach given the current low interest rates? Thanks for your help and your articles, which are the only financial information my wife pays attention to!

Tony

Hi Tony,

Excellent question. The word ‘bond’ throws people off. Your ‘investment bond’ doesn’t actually have to invest in bonds -- and in fact, given it’s a long-term investment for your kid, I wouldn’t advise it. Instead, you can choose to make the underlying holding a managed portfolio of shares. Lifeplan has a range of options that since 2008 have returned around 8 per cent for international shares and 10 per cent for Aussie shares.

Scott

D.I.Y. or R.I.P.O.F.F?

Hi Scott,

What is a reasonable ongoing management fee for invested funds? My wife and I have just over $1 million invested in our self managed superannuation fund. We paid $13,200 in management fees over the past 12 months, which works out at 1.21 percent. If published, please do not use my real name.

Wendy

Hi ‘Wendy’

First up, I always change people’s names.

Second, I’d argue that you don’t actually have a ‘self managed super fund’ ... you have a ‘financial planner managed fund’. There’s nothing ‘DIY’ about handing over $13,200 in fees a year.

For comparison, the super fund that I recommend to my friends and family charges 0.03 percent a year (with a mixture of ASX 300 shares, international shares and fixed interest). It also provides the opportunity to buy individual shares within the super fund (for an extra $280 a year plus $20 a trade).

In your case that would bring down your fees from $13,200 to about $400 a year. If you don’t have property in your fund (which I don’t recommend unless you’re a small businessperson), I reckon that’s a no-risk, guaranteed way to boost your super by at least $100k over the next 10 years.

Scott

The Ungrateful Son

Hi Scott,

My dad is offering me $25k worth of AFI shares to put in my portfolio. Sounds good but I was wondering what effects this would have on my tax. I take home $700 a week after tax.Thanks,

Nicholas

Nicholas,

Hang on a minute.

Your old man is giving you $25k in AFIC shares and you’re worried about your tax position!?

Let me explain how it works:

Let’s say AFIC makes $1 of profit, and pays 30 cents in tax. The remaining 70 cents in a dividend. When you do your tax return, you’ll declare 70 cents of income, plus 30 cents in tax credits for what AFIC have already paid. You’ll pay tax on the $1 at your marginal rate of 32.5 cent in the dollar. In other words, you’ll still get a post-tax dividend of 67.5 cents.

And if you want the benefit of compound interest, you should tick and sign the Dividend Reinvestment Plan letter that will be sent to you in the mail, which will automatically recycle your dividends into more AFIC shares, generally at a discount to the market price and without incurring brokerage.

In short, I’d suggest that the next time you see your father say something like this: “Dad have you been working out? Because you look amazing!” Then wash his car. Then thank him for giving you a financial headstart that most kids never get.

Scott

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

The Dairy Farmer

Hi Scott,

I’m a dairy farmer and feel I have been let down by our co-operative, Murray Goulburn. I now have a debt to them that’s been backdated. Should I pay it back or leave and not have to pay it back … you see, the debt stays with the factory and not the farmer.

Paul

Hi Paul,

You’re dead right.As I understand it, it’s not so much a debt, as it is a clawback (via accepting lower milk prices) over the next three years. For most dairy farmers that means producing milk at break-even at best, or a loss at worst.

So if you look at the situation rationally, you could walk away and avoid paying anything back, and avoid the next three years of painfully lower prices. You could sell off your cows, lease out your land (if you can), and get a job in town (if you can). And ride it out.

Yes, that’s a lot of ‘ifs’ and ‘coulds’. But as a hard working farmer, you’d be used to that. You can’t control the milk price, you can’t control the interest rate or terms the bank imposes on you, and you can’t control the weather. The only thing you can control is earning other sources of farming (and non-farming) income.

The $64 million question is, what will the milk solids price do?

No one knows, not even a bunch of overpaid corporate spivs sitting in Murray Goulburn HQ.

Scott

The Case of the Pushy Parents

Hi Scott,

At 24, I am finally ready to move out of home for the first time. I have approx $60k in savings and I earn $38k. I plan to rent first to ensure I can live successfully with my partner, but my parents think I should buy straightaway. I do not feel I have the financial resources to help me get a loan, let alone repay it. I would want to buy in my preferred areas in Perth, especially if living alone. What options do I have?

Chelsea

Hi Chelsea,

Tell your parents to back off. You’ve done well to save $60k at such a young age. Yet on your income you don’t have enough money to purchase a home, even if you were going to take on a renter. The upfront costs of buying would eat up most of your savings.

Here’s a more realistic challenge that I followed myself when I was your age, and on your income level. Get used to living off $38k a year and put all your efforts into increasing your income over the next six years. And bank the difference! Achieve that, and you’ll have established the financial habits that will mean you’ll never have to worry about money again.

With habits like that, buying a house will be easy.

Scott

Should I Buy My Office in My SMSF?

Hi Scott

I just read your column on property investment and it got me thinking about commercial property. You see, I hate paying rent and outgoings to run my psychology practice, so I am thinking about buying something instead. I am not sure if this is a good idea and would love to hear your thoughts.Kind regards

Kellie

Hi Kellie,

Great question. It can really make sense if your premises is a big part of the value of your business (like a restaurant or a retail store). If so, buying will give you more control over your business, and allow you to build up another asset. And if you buy it within your SMSF, all the lease payments will be investment earnings to your fund and so will be taxed at 15 percent. Capital gains tax (CGT) will be more favourable if you sell it when you’re retired.

That being said, buying in your SMSF is expensive and time-consuming, and can lead to your fund being too concentrated on one asset -- so you need to buy well! If you’re a small or solo practitioner, it may be better to screw down a shared rental in a clinic and focus on investing your profits elsewhere.

Scott

Getting into Bed with Random Weirdos

Hi Barefoot,

I earn $180k and have paid off my $600k home. I recently had a cold call from an investment group saying they can use the ‘income tax withholding variation’ to effectively negative-gear a property they were trying to sell us. The property is not going to be built for two years. Does this sound like a wise investment strategy?

Gerald

Hi Gerald,

The ‘income tax withholding variation’ can be downloaded from the Tax Office website. It’s not technical. Basically, all it means is that you can ask your employer to withhold less tax each payday, rather than having to wait till the end of the year for your refund.

Dude, the bottom line is that they’re really selling you a tax turkey. If you’re earning $180k you must have brains. So why are you contemplating buying a non-existent investment from random weirdos who cold call you?

Scott

Binary Tilt

Hi Scott,

Can you please look into a company called Binary Tilt. They are offering very high weekly returns. Is it too good to be true?

Dennis

Hi Dennis,

Yes. Yes it is.

Scott

We’re in a Fix!

Hi Scott,

Around 18 months ago we fixed our mortgage rate at 4.84 percent for three years, thinking it was at the bottom of the cycle. It has since dropped several times. Our minimum repayments are $378 per week, but we pay $450 on approximately $195,000. It will cost about $2,500 to get out of the fixed rate. Would we be better off financially staying put for another 18 months, or changing?

Donna

Hi Donna,

Your situation is exactly why I advise people not to fix, unless they’re on the bones of their backside.

You’re paying about 1 per cent over the odds right now -- and Commbank is forecasting we’ll get another two interest rate cuts this year (though they didn’t forecast whether they’ll actually pass them on!). Still, your relatively small loan balance means that it’s currently costing you about $100 a month.

Contrast this to your $2,500 break fee, and I think it makes sense to ride this out. But make sure you learn your lesson -- and screw down get the cheapest variable loan you can in 18 months’ time!

Scott

My Boyfriend is Moving Too Fast

Hi Scott,

I am worried my partner might be doing something silly. I am 23, he is 27, and as a couple we are on about $140k a year -- with $40k in shares, $10k in Mojo, two cars paid off, no debt, no kids. He is thinking of buying his mother’s house for $400k as an investment property. He plans to negative gear it and is rushing to complete the sale before the election. We only have the Mojo money for the deposit. Are we moving too quickly? Could we be worse off in the long run?

Lisa

Hi Lisa,

My advice to his mum is to get an independent valuation before she sells to her son!

Now my advice to you.

What’s interesting is that you talk in terms of ‘we’ -- “we are on $140k a year”, “we only have the Mojo money for the deposit”. Yet your partner sounds like he’s an ‘I’ type of guy.

If you’re truly a partnership, you’ll make decisions as a team.

Personally, I’d never make a major financial decision that my wife wasn’t fully on board with.

That’s not only because we’re a team, but because I respect her opinion. Women tend to have a sixth sense of ‘safety’ when it comes to money that most hunter-gathering blokes don’t have. (Maybe that’s sexist, or maybe I just have an amazing wife.)

Bottom line: if he’s not willing to consult you on your concerns -- and he expects you to put your money in -- then my advice would be to stop thinking about your money as ‘ours’ and more about it as ‘mine’.

Scott

The dirtiest, slimiest, most heartbreaking scam of them all.

This week, it’s National Consumer Fraud Week.

And today I’m going to talk to you about the dirtiest, slimiest, most heartbreaking scam of them all.

(No, it’s not the Nant Distillery in Tasmania -- although I’ve got my eye on you guys.)

What makes this scam so shocking is that it’s an ‘inside job’. And it happens every single day.

Here’s a real-world example, courtesy of a woman who rang my radio show a few years back:

Woman: “A year ago my mum had to go into a nursing home because she has dementia. She has almost $115k in savings which she no longer has any use for, and I have a son who has just been accepted into acting school in New York.

My siblings and I are wondering what the cost implications would be if we take the money out now and divide it between the family.

Will we pay more tax doing it that way?”

Barefoot: “Can’t you wait until the poor woman dies?”

Woman: “Sorry?”

Barefoot: “You are stealing her money.”

Woman: “No, I’m calling because I want to know about the tax implications of…”

Barefoot: “No, you are stealing her money.”

Woman: “She doesn’t need it.”

Barefoot: “Who says?”

Woman: “I do!”(And with that the woman hung up on me.)

The Worst Scam in the World

Clearly, this woman didn’t feel that she was doing anything wrong.In her mind, she and her siblings were going to get the money eventually … why not just speed it up?

This is known in the industry as ‘inheritance impatience’.

Though I prefer to call it ‘Granny Greed’ (or Grandpa Greed).

“It’s pretty consistent,” says Greg Mahney, the CEO of  Advocare.“Research shows that about 1 in 20 will experience some form of elder abuse, and the most common is financial abuse.”

Though no one really knows the true figure of course.

After all, what parent wants to admit their family are ripping them off?

And sadly, it mostly is family that do the damage: the latest research from Advocare suggests that 89 per cent of perpetrators are family members.

We’re not talking peanuts either. In the 2013-14 financial year, the Elder Abuse Prevention Unit in Queensland uncovered 139 older people who were ripped off to the tune of $56.7 million in total. And that’s just in one state.

Statistics are one thing, but let’s look at three real-life case studies, given to me by Advocare:

Case Study 1:  Down in the Dumpster

An elderly woman lived in a nursing home while her son took care of her home. He got her to sign some paperwork for bills relating to the house, which she did without checking. An aged care advocate drove past her home later that day and saw that her possessions were being thrown into a skip, and a ‘for sale’ sign was placed on her home. He’d had her sign an authority to sell.

Case Study 2: Granny Falls Flat

An elderly woman sold her house and gave the proceeds to her daughter and son-in-law, so they could build a granny flat onto their home, where she could live for the rest of her life. A few years later, the couple divorced and the family home was sold in the separation of assets. It severely limited her aged care options.

Case Study 3: The One-armed Bandit

A frail elderly man living in a retirement home gave his daughter his ATM card to get some basics from the shops. An aged care advocate checked their bank account and found thousands of dollars of unauthorised transactions -- from pokie venues.

Here’s the thing: most of the kids get away with it.

Why?

First, it’s the circle of life (as Elton John sang). Elderly parents often rely on their kids to dish out their pills, feed them, clothe them and drive them around. They rely on them.

Second, they’re coming to the end of their lives and don’t want to harbour a grudge.

Third, there’s the grandkids.

Heavy, huh?

Well, mark my words, this is going to become a much bigger problem, for a few reasons.

The property boom has many oldies living in million-dollar homes while their kids and grandkids struggle under the weight of massive mortgages. Rising superannuation has meant that we’re creating the wealthiest generation to ever retire. And then there’s another boom: it’s predicted that by 2050 in Australia people aged 65 and over will double, and dementia will triple.

So what can you do to protect your ageing loved ones?

Well, on a practical level, you need to ensure that your entire family are on the same page, and that they respect your parents’ wishes -- even if they don’t agree with them.And make sure that  everything is documented with an independent legal expert -- keeping a close eye for the idiot brother-in-law who’s always scratching around with a sob story looking for a ‘loan’.

The other thing to do is appoint two enduring powers of attorney:

One from the family and one from outside the family (preferably a trusted friend or even a lawyer) who doesn’t have dibs on Aunt Mavis’s BHP shares in the will. If they’re appointed jointly, it means they’ll have to make their decisions jointly.

And hopefully they’ll act in the best interest of the person who matters most.

Tread Your Own Path!

The Banker and the Dog

Scott,

My wife and I are 40, with two primary-school-aged kids. I seek your investment opinion. We are now mortgage and debt free, with $2 million in cash due to an inheritance. Our investment goals: long-term growth combined with cashflow return to earn $40k p.a. We are thinking 70 per cent in property and 30 per cent in shares. Our banker suggested UBS Callable Goals, which is linked to four Australian bank shares, maximum 3-year, which pays an 8 percent fixed coupon. What would you do?

Danny

Hi Danny,

OK, here’s what I took out of your question:

You’ve done well! The only thing that could hurt you now is if your friendly banker works out that you’ve got 2 million large burning a hole in your pocket.

I had a glance at the ‘UBS Callable Goals’ product he recommended you. My first thought was: ‘this is a pile of dog turd’, but on second thoughts, I don’t want to disrespect my dogs do-dos. It looks like a bunch of very smart bankers have conjured up a confusing product so they can make a boatload of fees (up to 3.75 per cent up front, apparently).

Yes, they’re headlining that you can get a potential return of 8 per cent (by writing options against bank shares), but the fine print shows that if there’s a ‘kick-in event’ you could lose 65 percent of your investment. But win, lose or draw, you still pay the bankers their fees.

Dude. You have $2 million bucks, so quit playing these silly games. A 5 percent dividend yield from a few old-fashioned, low-cost listed investment companies will generate you $100,000 a year. Peace.

Scott

Wife Doesn’t Want to Be Twenty Again

Hi Scott,

My wife and I are both 53. I earn $110k but our living costs are consuming our income, leaving nothing for extras or contingencies. We have exhausted our savings and rung up $24.5k in credit card debt, with another $8.5k drawn against our home -- which is worth $500k, with $403k owing. We have an investment townhouse in Brisbane worth $370k, with $322k owing. Our refinancing options are limited as our debts are equal to 85 percent of our assets. The way my wife puts it, she does not want to ‘go back to living like we did in our 20s’. What are our options?

Lindsey

Hi Lindsey,

Sounds like your wife is half the problem (and … you’re the other half). She may say she doesn’t want to live like you did in your 20s, but you guys are behaving like it. You’re 10 years out from your retirement and you’re funding your lifestyle by credit cards? Seriously?!

Yes, you can sell the townhouse, which will pay off your credit card debts, and maybe your line of credit (remember, though, you’ll pay capital gains tax). However, it’s a near certainty that you’ll end up right back where you are now unless the two if you get on the same page. And by that I mean convince your wife that there’s more long-term pleasure in being financially secure than there is mindlessly adding to the nation’s landfill.

Scott

Budget Horror

Hi Scott,

I am one of your Barefoot buddies. I write as I am greatly concerned about the proposed Budget changes to superannuation. I am 58 and I have four investment properties on which I have significant debt. A month or so ago I decided I would sell the properties, pay off the debt and put the profit into superannuation. I was hoping to get around $1.5 million into super (I currently have $300,000).

After the Budget I am limited to a lifetime cap of $500,000. What makes me angry is that the Government has said that people can have up to $1.6 million in super when they start a pension phase, but the new rules will not allow me to reach the cap. This all seems grossly unfair to me. What can I do?

Renae

Hi Renae,

Well, you can vote Labor! Their super policy will allow you to contribute $180k a year post-tax into super.

But, other than cosying up to Bill, let’s see what you can do:

Yes, you’re dead right -- the changes to super in the Budget are aimed at limiting the amount of money that wealthy people can invest into super in the future. But on the brightside, you’ve got $1.8 million in investable assets. That’s a very first world problem you’re suffering.

On a practical level, so long as you haven’t made a post-tax contribution since 1 July 2007, you’ll be able to contribute $500,000. If you’re married, your hubby could do the same in his fund. You can also make a pre-tax contribution of $25k a year until you’re 75 without having to satisfy a work test.

To be honest, though, super laws these days are about as reliable as a Donald Trump election promise. You get the feeling that, eventually, whoever ends up in charge will build a giant wall around super and tax the hell out of it.

Scott

My Girlfriend is in Hell

Scott,

My girlfriend is stuck in financial hell. Her estranged husband, who lives upstairs, is a gambler and has lost it all, a couple of times. The house they live in is in held in trust by his parents. She has started her own business (cleaning) and is doing well. She has the income … until he steals it. Who does she go to? She has no assets, just cash hidden. She wants to run, but can't. He has taken out loans in her name in the past. So how can she get a loan to buy a house?

Tom

Hi Tom,

Intense! And … a little bizarre.If things are as bad as you say they are, you should encourage her to leave and start the process of a formal separation. She should also immediately shut down any joint accounts she has with him. If there’s a silver lining it’s that she’s in a slightly better situation than some women, in that she’s earning a decent income that will hopefully tide her over (in a rental property) until her situation becomes clearer.

Scott

Australia's Youngest Property Owner

Picture this, it’s April 26. 3:30pm.

Malcolm Turnbull and Scott Morrison are deep in the ‘burbs.

The media pack is in tow, getting ready for a photo opportunity.

Today’s pitch? That negative gearing is the way everyday Aussies (voters) get rich -- and, unlike Labor, the Government won’t mess with it.

The Prime Minister peeks through the front door and surveys the battler family.

Turnbull: “He looks ethnic. She’s a blonde. They have a baby. All my ‘demos’ covered under one roof. Excellent.”

Sco-Mo: “Mal, before we go in … there’s just one thing … the apartment. It’s for the kid.”

Turnbull: “What?!”

Sco-Mo: “It’s negatively geared … for the one-year-old.”Turnbull: “Oh for christsakes. Who organised this sh…oot? It was one of Tony’s old staffers, surely?!

Sco-Mo: “It’s too late to back out now. The cameras are rolling. Just smile. It’ll be all over soon.”

A few awkward minutes later, and with the media money shot in the can, it was all over. Yet while there was a lot of fanfare, the only person who didn’t get their say was Australia’s youngest homeowner, baby Addison. So let’s fill her in with what’s going on.

A letter to Baby Addison

Dear Addison,

Your parents love you.When I was a one-year-old all I got was second-hand cigarette smoke, and a Melbourne Footy Club beanie. Your parents bought you a home!

Now, given you’re already crawling up the property ladder, it’s time we had a grownup chat about the true costs of being a property investor in 2016. See, despite interest rates being at all-time lows, your parents will actually lose money on your apartment every single year.

Let’s take a look at the numbers:

First, before your parents got the keys they had to shell out $22,144 in stamp duty, plus legals.

Then, even if we factor in healthy renting increases and an unlikely 100 per cent tenancy -- over the next 20 years they’ll lose $237,900 (see box).

Boo! Hiss!

Yet they’ll also get an annual negative gearing tax break, which will lessen their total after-tax losses to $155,800. Or, looked at another way, the hard-working nurse who delivered you (along with every other taxpayer) will chip in $82,100 over the next 20 years to help fund your loss-making investment.

So on very conservative figures, your parents will lose $178,944 over the next 20 years.

Now the majority of property investors today have absolutely no problem with that.But I do.I hate the idea of losing money every single year for 20 years -- even if I’m getting a tax break. Call me old-fashioned, but when I invest my hard earned money I expect my investments to put money in my pocket every single year.

And when I reinvest my returns each year, I’m getting something known as compound interest. Albert Einstein called it the eighth wonder of the world. That’s because, over time, you earn interest on your interest, and your returns snowball.

That’s the guaranteed way to get very, very rich.

But that’s not going to happen for you, unfortunately.

Your apartment won’t get the benefits of compound interest, because every last dollar of income (in the form of rent) that your parents receive, is completely gobbled up by your costs: to the bank, and to keeping the apartment. The only way your parents will make money is if the price of the apartment increases.

The Alternative: Create A Bond With Your Kid

But let’s be old-fashioned.

Instead of losing money each year, let’s save.

Now let’s run the numbers on investing the same amount that your parents will lose over the next 20 years in a low-cost, old-school investment bond, invested in an Aussie managed share fund.

For argument’s sake we’ll say your parents kick it off with $23,144 (what they paid in stamp duty and legal fees) plus what they lose (after tax) every year into the investment bond (which, as I’ve said, totals $155,800 after 20 years).

Assuming a conservative after-tax 6 per cent return, and annual investment fees of 0.78 percent, in 20 years your bond will be worth … $364,563.

A good deal for you, but an even better deal for your parents.

Here’s how I’d sell it to them, Addison.

“Mum and Dad, if you fund my future with savings, instead of debt, you’ll feel a lot less pressure. You won’t have to worry about losing your job, or not being able to fund the shortfall.”

(Which in the first year is approximately 10 per cent of your take-home pay.)

“You won’t have to worry about interest rates jacking up.”

(Let’s face it, interest rates won’t stay at a historical low for the next 20 years.)

“You won’t have to worry about your tenants breaking things, or leaving you in the lurch.”

(The figures we’ve used factor in a 100 percent tenancy over 20 years -- which won’t happen.)

“You won’t have to worry about greedy land tax grabs from the State Government.”

(They’ve got form here.)

“You won’t have to worry about changes to negative gearing.”

(Which, like changes to super, could change the game completely).

“You won’t have to worry about paying another round of stamp duty when you transfer the apartment to me in 20 years’ time.”

(Which will eat up another 4 per cent of your capital.)

“You won’t have to worry about paying capital gains tax at the end of it.”

(Investment bonds are totally free from capital gains tax free after 10 years.)

“So, Mum and Dad, for all these reasons I think you’ll agree it makes sense to save, rather than speculate. And besides, if you do, you won’t have set a precedent to buy my future brothers or sisters their own negatively geared apartment, which on these figures you won’t be able to afford … even with negative gearing!”

Tread Your Own Path!