Cash surplus is a rich problem

WITH a house in the suburbs, Nicki, 52, and partner Leonie, 43, are debt-free and without too many financial concerns.

But having worked hard to get to this point, they are now wondering what they could do to make their money grow.

One goal is to buy a more comfortable house in the same area but the couple are in a dilemma as to whether to borrow more than the $500,000 extra they think they may need to upgrade to something suitable.

Another option is to spend about $200,000 extending their current house, although they are worried about overcapitalising.

"We are in a bit of a stalemate as to where to go from here in regards to our financial security and future living arrangements," Nicki says.

Nicki and Leonie want suggestions as to where they could invest their savings and combined after-tax income of about $2000 a week.

Having bought property to live in, an investment property is something they would be comfortable with. Investing in shares is less familiar to them as they have no experience or confidence in their stock-picking ability. But they are open to ideas.

The couple have no retirement plans, although they admit it would be nice to have the time and money to do more travel. They aim to take six weeks off for a trip to Europe in 2010 or 2011.

"We could sit and do nothing and enjoy the benefits of having no debt and no worries," Nicki says. "This option seems very nice but as we've worked so hard to get to this position we feel it may be a waste not to do something else."

FINANCIAL SNAPSHOT

Names: Nicki and Leonie

Ages: 51 and 43

Occupations: Photographic sales professional and school teacher

Salaries: $60,000 and $90,000

ASSETS

Property : semi worth $950,000

Super: $125,000 and $130,000

Investments (managed funds or shares): $5000 cash in the bank: $50,000 term deposit and $5000 cash

LIABILITIES

Mortgage debts: nil

Other loans: $20,000 interest-free loan

Credit card debts: nil

THE AVERAGE WEEK

After-tax income

Salaries: $2000

Rental income: nil

Total: $2000

EXPENSES

Rent (per week): nil

Home loan: nil

Personal loans: nil

Investment loans: nil

Investment property costs: nil

Living expenses (per week): about $1200

Total: $1200

ERROL WOODBURY

Woodbury Financial Services

Remaining comfortable versus maximising your savings and surplus is really more of a question of when you want to be financially independent and how much you will need to achieve this.

If this goal is 10 years away and you would like to retire on similar to what you earn now, salary sacrificing into super would be your first option but you could then look to gearing (borrowing to invest), which not only creates wealth but also produces tax savings.

For example, using your house as security, you could borrow an amount based on what you could afford to service and invest in property or shares. Which is better? Either should make money for you so it comes down to a personal choice based on your interest, comfort level and understanding of both.

Regardless of performance, the main difference is shares can give you more flexibility in that you can access the funds if you need to. Australian shares carry extra tax benefits called franking credits. So if the performance of shares and property were equal over the next 10 years, based on these two differences, shares would often be more favoured.

SUZANNE HADDAN

BFG Financial Services

You are in a strong financial position and have choices in how you can utilise your excess cash flow.

Regarding the upgrade of your house by taking on a $500,000 mortgage, you can afford the loan, based on repayments of $800 a week, but it will take about 26 years to repay. Choosing this option will probably limit other lifestyle choices in the future such as travel, time out of the workforce or semi-retirement.

The second option of upgrading your house for $200,000 is a more cost-effective option because the expenses of moving and stamp duty are avoided. Also, the loan should be able to be paid off in just under six years. However, as you have said, you must check that improvements do not overcapitalise the property.

Whichever option you choose, the goal should be to minimise the amount borrowed and repay the loan as quickly as possible because the interest paid is not tax deductible. You should use excess cash to help with the house purchase or upgrade and borrow less.

Another issue is to make sure you have personal risk insurance in place in the event of death or disability.

MIKE INGHAM

Godfrey Pembroke Camberwell

It's time you had a financial plan that ensures you can retire with enough money to enjoy life and lots of travel. Your relatively modest super balances and lack of a savings strategy mean your retirement nest egg may be inadequate.

If you both work to age 60 and have your super invested in a balanced super fund, I calculate your combined super balances would amount to about $600,000. This could provide you with a combined tax-free income of $60,000 (in today's dollars) for about 14 years after Leonie retires.

The key is to boost your savings by making tax-effective salary-sacrifice contributions to super. Salary sacrifice contributions are taxed at a maximum rate of 15 per cent instead of Nicki's marginal tax rate of 31.5 per cent or Leonie's higher rate of 41.5 per cent. So you pay less tax while you save.

If you each made salary sacrifice contributions to super equal to 12.5 per cent of your pre-tax salaries, your nest egg could be about $885,000 when Leonie retires. A much better outcome you could receive a tax-free pension income of $60,000 until Leonie is at least 86.