Print This Post  Email This Post

$360K in cash management account. Should I leave it there?

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

Q. I’m 57 work part time, own an investment property which is rented out.  I own my home and also have investment in trees.   Please advise me what to do with $360,000 in cash management account.   Should I put it into my super, buy another investment property or investment portfolio ???

Josie’s answer: Obviously I don’t know what income you would like to generate when you do finally retire, but sounds like you are on track to achieving a comfortable lifestyle in your twilight years.   My thoughts are as follows:- (please remember that it is general advice only)

What is your risk profile?  In other words how comfortable are you with the ups and downs of the investment markets.

Based on your current asset allocation, it seems to be conservative .   The majority of your money is invested in residential property and cash.  You have very little invested in Australian and international shares.

I know they have been hammered recently, however, based on historical returns, they have generated above average growth and income.   Just highlighting the importance or not putting all your eggs in the one basket.

For example, if the property market flatlines over the next 5-10 years, your investment will struggle to just keep up with inflation.  Furthermore, it is more likely that interest rates will go down, which means that the income you generate from your cash investment will also go down.

Cash is king at the moment, and definitely the safest place to invest in these very uncertain economic times.  However, you need to remember that  there is no growth attached to cash investments, but at least they don’t decline in value.   The old adage ‘the lower the risk, the lower the return’ is so true.   The way I judge how my investments are going, is to work out the after tax, inflation and fees return.

After all these deductions, if it is more than 3% pa, then I am doing reasonably well (but in the cash of property and shares, I judge it over a 5+ year time frame).  As an example, let’s say your cash management trust is paying 7.0%pa.

If your tax rate was 30% (taxable income between $34K - $80K), then your after tax return would be 4.9%.  Inflation is currently around 4.5%pa.  Therefore, your after tax and inflation return is a lousy 0.4%pa (7.0 - 2.1% - 4.5% = 0.4).  Scary isn’t it!

I don’t know what your personal tax rate is, however, if it is more than 15%, i.e. you earn more than $34K per annum, then you might be better off, investing the funds in super.   The maximum tax on super is 15%.

As I have said on a number of occasions, please do not see super as an investment.  It is simply a vehicle which has fantastic tax concessions.  You choose where you want to invest your money.

It could be within a cash investment or you can even buy residential property within your super fund (by setting up a self managed super fund).   Because super is so attractive to the wealthy, they limit how much you can contribute each year.

You are permitted to contribute $100K (over 50 years of age) of concessional contributions per year (pre tax dollars, e.g. employer contributions, or if you qualify as a self employed person,  and therefore claim it as a tax deduction).

Furthermore, you are able to contribute $150K per year in non-concessional contributions (after tax - they go into the fund tax free and you can withdraw them tax free).  However, you can contribute $450K, but that’s it for the next three years.   It is well known that I am a big fan of super.  When you turn 60 years of age, you will pay no tax on the earnings within the fund or on any withdrawals (assuming you are drawing a pension).

It just doesn’t get any better than that.  Therefore, you need to further investigate this strategy with your accountant or financial adviser.

I am ambivalent about purchasing another investment property, only because I am not bullish about the property market in the medium term and concerned about the lack of diversification within your investment portfolio.

A personal opinion only and I hate the hassles associated with having tenants.   If wages go up significantly then I think prices may rise, but if they don’t, the lots of people will not be able to afford to purchase.  Sure they will need to rent, but then again, they too will be restricted in terms of what they can afford.   Just remember, that residential property is not a guaranteed investment.

I have met plenty of people who have made losses (they have correctly worked out the after tax and after expenses return!).   Just have to see what is happening in overseas, particularly in the US.

They thought their prices would never go down and they got that wrong!    Just remember that if you purchase the property outside the super environment, then it will be subject to tax, even when you turn 60 (assuming you are generating reasonable income).

Furthermore, you will have to pay capital gains tax when you sell if you make a profit (tax free in super if you are drawing an income).

As far as your investment in trees goes;  Sounds like your accountant might have encouraged you to do this for the tax deduction.   I am personally not in love with them from an investment perspective, but I don’t know anything about your financial situation.

To sum it all up, I am sure you would love me to be more specific, but I can’t.   You need to do a lot more research, make an informed decision and stick to it.    I encourage you to sit down with an accountant and investment professional.   Another decision to make and who do you trust???

Cheers, hope all the above makes sense and wishing you happy money organisation.  Josie Kay

Sponsor -  Not sure about a property value? Get your property report in 5 seconds! The Individual Property Report from PropertyValue offers an estimate of a property`s current value, suburb and postcode median prices for houses and units, recent and surrounding sales, map detailing local amenities and much more.

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com.au. For your information, the average hourly rate for a Certified Financial Planner is approximately $250 per hour.   Josie does not ask for money.     She relies on word of mouth, and would  be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached!

ps. we are continually trying to improve this service, your feedback would be greatly appreciated.

Similar Posts:

• $1500 Co-contribution for my children and excessive fees in super funds
• What is Investment Risk?
• What is the Rule of 72?
• I am 60 and have $100K in super. Should I leave in super or withdraw?
• Do I get a refund of tax when my super is negative?