Using leverage or borrowings to increase your retirement assets
It is estimated that a couple require about one million dollars in retirement assets in order to fund a comfortable retirement. This will generate about one thousand one hundred dollars ($1,100) per week for approximately twenty five (25) years. That is, if a couple retire at age 60 this investment will expire at age eighty five (85) years old.
It is important to note that many people, particularly executives and professionals would find it difficult to live on one thousand one hundred dollars per week.
It is also important to note that this retirement target of one million dollars of retirement assets, excludes your lifestyle assets, such as the family home, unless you are planning to downsize your home.
Also, this target of one million dollars is increasing by the Consumer Price Index (CPI) each year and assumes that you own a home, the debt on the home is paid off, and there are no children still living at home.
It is my experience that many people in their forties and fifties will not accumulate sufficient superannuation over the next ten to twenty years as they focus on education cost for their children and paying off their mortgage.
In order to grow their retirement assets more people are considering borrowing to invest within their superannuation rather than relying solely on their statutory nine and one half percent superannuation. This strategy has become so popular in fact that the Australian Taxation Office estimates that borrowing within superannuation has tripled over the past four years.
The regulations of superannuation funds have previously frowned on borrowings within superannuation but in 2008 the government changed the legislation to allow borrowing under certain conditions.
The borrowing within superannuation is referred to a limited recourse borrowing arrangement or LRBA. A LRBA means that the lender can only have security over the asset being purchased and there is no recourse over other assets within the superannuation fund or the investor personally. This protects the superannuation fund’s other assets.
The LRBA can only be used to purchase either a single asset such as property or a collection of identical assets that have the same market value – such as a parcel of shares or units in a Managed fund.
These days borrowing is popular in Self Managed Superannuation Funds (SMSF) as people realize how difficult it is to reach their retirement goals, particularly in a low interest rate environment.
Should you require any information please contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.