Given the large increases seen in property values in recent decades, combined with more and more of us living well into our 90s, the problem of being asset rich and cash poor is becoming increasingly common.
Another way to frame this problem is something an old neighbour said to me once, “Paul, you can’t eat bricks”.
It’s great to be financially secure and have significant assets behind you, but you need cash flow to pay the bills and put food on the table. That’s easy enough whilst you are working, but once you retired you either need your assets to be throwing off income, or else liquidated to be available for spending.
In this week’s post we’re going to look at a few ways that you, or perhaps an older family member you care for, might be able to solve the problem of being asset rich but cash poor.
In many respects, the “problem” of being asset rich and cash poor is a good problem to have. Much better than being asset poor and cash poor. Here, you have assets, the problem is they’re not easily spendable.
In most cases, the family home holds the answer to solving the asset rich cash poor problem.
The most obvious solution is downsize. Sell the home you currently live in, buy another home at a lower price point, and then with the cash that you freed up, use that to live.
There are some generous government provisions around this. Most states have concessions on stamp duty where someone is downsizing, which can be very helpful given the level of stamp duty seen on a lot of transactions, particularly in Sydney, Melbourne and Brisbane.
There are also the downsizer provisions within superannuation which enable you to boost your super with funds that came from a property sale. This can be helpful on a number of levels. For one it’s getting extra savings into the tax-free income stream area of pension phase superannuation. It also gets around contribution cap issues, most particularly the non-concessional contribution cap, where you may have already utilised the bring forward provisions at the time of your retirement. Downsizer contributions have their own distinct limit so this produces a lot of flexibility in your strategy.
But downsizing is not the right solution for everyone. Often people have a local community around them, something that is of increasing value as they get older, and so downsizing, which would often require a move to a different area, is just not palatable. I’ve had some clients find that the sale price they could get for their home, which they’ve lived in for 40 years or more, and therefore is perhaps a little tired and dated, the price they would get compared to what they would need to pay for perhaps a smaller townhouse or unit in the same suburb, well there just wouldn’t be any money leftover from the changeover. In fact maybe they’d have to find some extra money to make that work, and clearly that defeats the whole purpose of the move in the first place.
The other issue is that downsizing can negatively affect your Age Pension. For asset test purposes your home is ignored. However you can imagine that if you sold your house for $1.5million, bought another house for $1,000,000, freeing up $500,000 in the process, this $500,000 gain will now wind up in the asset test for Centrelink purposes, which will significantly reduce your pension benefit. Now to be fair, it’s likely that the earnings on your $500,000 will exceed what you lose in the age pension, but still, it’s a bit of a kick in the guts when you are trying to create more cash flow.
The Pension Loan scheme can be a great alternative here. This is a government scheme that loans you money against the value of your home. You can get smallish lump sums but more typically you get a regular income. They have a formula for determining what is possible but the key concept is that you are not required to make any repayments on this loan, either during your lifetime, or until your home is sold, and there is no situation where the government will ask you to sell your property to clear the debt. It’s a type of reverse mortgage but being provided by the government, it’s a scheme that people are a bit more comfortable with than the private providers. To my mind, the Pension Loan scheme is likely the number one solution to solving the asset rich, cash poor problem, assuming you don’t wish to downsize. Note that you do need to be of Age Pension age to access this scheme, which for most people is age 67.
Sometimes this asset rich, cash poor problem crops up for people with two properties, a home in the burbs, and a beach house. When they had a young family and wages coming in, they could manage the two properties just fine. And now that they’re retired, they find they’re using the holiday house more and more. But the second property is likely to knock them out of any Age Pension entitlement, plus two properties means two lots of council rates and other bills. Unless you do a little holiday rental, which I’ve never seen done with retirees though I’m sure it must happen sometimes, then neither of these assets provide any income to help you live, or even just cover their running costs.
What can work well in this scenario is to sell your primary residence given, that it is capital gains tax free, and move down to your beach house. You could potentially buy a small apartment in town if you wanted to have a foothold there, but the capital gains tax free nature of your primary residence is really quite significant.
Sometimes the problem of being asset rich and cash flow poor stems from holding assets that have a significant capital gains tax liability embedded in them. Perhaps you were granted a significant parcel of company shares as an employee of a business and those shares have now risen in value considerably. Or maybe it’s an inherited asset where you also inherited the cost base.
To a degree, the solution here is simply to suck it up and pay the tax. However you might be able to soften the blow by using unused concessional contribution caps to make a catch-up super contribution. You can go back five years and utilise any unused caps with this amount then being a tax deduction in the year the contribution is made. You’d need to crunch the numbers with your financial planner or accountant but we’ve certainly worked with some clients who have had six figure capital gains, and we can get that number down quite considerably by applying this strategy.
To wrap this episode up I guess just remember that there is no trophy for being the richest person in the cemetery. You’ve worked hard for your money, don’t be afraid to spend it in your later years. Just work with your financial planner to ensure that your rate of spending is sustainable, and once you’ve ticked this box, get out there and enjoy the fruits of your labour.
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