John has turned 55 and intends to work until 65 unless he can afford to retire earlier. He has super worth $300K and a rental property he could sell and net $300K. This case study* looks at two options:
Do nothing OR
Sell the investment property, put the money into super and start a pre-retirement pension.
The first chart shows what happens to John's income over the next 10 years for each of the two options.
In year 1 if he did nothing (option 1), his total gross income is $72K ($60K salary + $12K rental income). After tax, his net income is $54,720.
However, with option 2 his total is $84K ($60K salary + $24K pension minimum). After tax, his net income is $68,520.
John has now generated extra net income of almost $14,000 using this strategy. If he recontributes this amount back into super over the next 10 years you can see how this affects John's wealth balance at age 65.
In the second chart, option 1 (do nothing) leads to an estimated value (super + property) of $1,150,301. After selling the property this reduces to $1,137,733 because John has to pay capital gains tax (CGT).
However, option 2 leads to a total estimated value of $1,327,030. That's a huge difference of $189,297!
*Assumptions we've made
John's property sale nets him $300,000.
The $600,000 super is converted to an allocated pension.
9% employer super guarantee contributions continue for the 10 years.
Return on super is 9% (3.5% income/5.5% growth).
Return from property is 7% (4% income/3% growth).
Excess income generated recontributed back into super.
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