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Debt and Retirement – The Importance of a Retirement Plan at least 3 Years Prior to Retiring

When advising clients in the lead-up to retirement, one of interesting aspects Hudson advisers have to deal with is – “What to do with debt?”

Hudson clients are well aware that borrowing to invest in growth assets can be a magnifier when creating wealth. Borrowing can help increase the asset base and provide some taxation relief to support the investor during the years it takes to allow the asset to increase in value. Clients generally use gearing to help buy investment properties and shares, direct or indirect. Of course it is not without significant risk, however sound advice and good strategies can help minimise the risk of it all going wrong.

So coming into retirement, many clients have built a significant portfolio of assets, and attached to that is an amount of debt. What should they do heading towards retirement? The answer to this depends on the member’s circumstances and goals. Let’s look at some of those situations:

  1. When the net assets that are geared are well in excess of the retiree’s needs during their lifetime. This is a rare circumstance, but in this case we need to ensure that the net cash flow position is a positive one allowing for any future rate rises. Consideration then needs to allow for passing of the assets to the next generation with regards to equitable distribution amongst individual beneficiaries and their own personal needs (ie they may have a high marginal tax rate, be bankrupt, on benefits, divorcing etc), capital gains liabilities, and other issues. Bequeathing an asset with an attached tax liability is very different to passing an asset that is totally tax-free.
  1. When the net assets will be needed to fund the retiree’s cash flow sometime later in their retirement. This means that the retirees have a reasonable amount of other retirement assets and can support their income requirements for a number of years before needing to realise their geared investments. Consideration then needs to be given to issues that will arise at the time they sell the asset. Is capital gains tax going to be an issue? Will they be entitled to use strategies to limit the tax liability (ie make a deductible contribution to superannuation)? Will they be able to efficiently structure the net proceeds to last the remainder of their lives? If they have passed the threshold age and are no longer working then the benefits provided by the superannuation environment may be out of their reach.
  1. When they will need to access the equity from the geared assets leading into retirement. This means that a careful plan to migrate the net proceeds of the assets to the most efficient environment is needed. Often it could involve a sell-down, repayment of all outstanding debt and placing the net proceeds into Superannuation. If the asset is liquid then it can be broken into manageable parcels and sold in subsequent years to minimise the effects of capital gains tax. If it is not readily liquid and has to be sold in its entirety, then very special planning is required.

Key strategy – one possibility is to sell an investment property that has a capital gain just after retirement but early in a financial year (e.g. mid July). That way, the individual hasn’t earned much income and the capital gains tax will be minimised.

Lets have a look at a Case Study

Robert is planning to retire in 3 years time, at age 65. He has 3 properties worth $1.2 million with debts of $680,000. He earns $65,000 pa and hasn’t been able to direct a lot of income towards superannuation over his working life, he has only $100,000 accumulated. He said he feels that property growth could be subdued going forward in the shorter term. He would like to have retirement income of at least $40,000 pa in retirement.

If Robert continued with his properties then he might gain little positive cash-flow (probably negative) until well into retirement, and he might only gain very limited support from the Age Pension.

His strategy could be to free up some of the equity he has already gained in his property portfolio.

Robert plans to sell one property in the new financial year for $400,000 and arranges salary sacrifice to Superannuation of $50,000 (using catch up concessional contributions) to limit the tax on his gain to only 15%.

He uses the remaining equity to reduce debt and make an after-tax contribution to Superannuation.

The next year he decides to do the same again, and is left with one property worth $350,000, no debt and $260,000 in superannuation.

In his last working year he salary-sacrifices $35,000 to Superannuation and then retires.


He owns an unencumbered investment property worth $350,000 and has $300,000 in superannuation to support himself and his wife in retirement. He derives his income from $11,000 net rent and $15,000 allocated pension payments, and qualifies for $16,000 age pension. Total retirement income of $42,000! No tax payable as the Allocated Pension income is free and Senior Australian Tax offsets are sufficient to avoid tax on his modest rental income. And his assets should last him the remainder of his life if managed carefully.

Hudson now call these plans –THE PATH AHEAD. Over the next month or two we will present one of these plans via an online seminar to highlight the importance of a well structured retirement strategy. The price varies from $2500, for a simple plan with few assets – $10,000 for a complex strategy with trust structures and many different assets. Your adviser can offer you a tailored price. To find out more about THE PATH AHEAD, contact us here.

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