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How to invest a $200,000 inheritance

I am 45 years of age and my wife is 42 and our two kids have left school and are studying but they earn enough money to be off our financial hands! We have $180,000 left on our mortgage and we are both teachers nowadays and have recently received an inheritance of $200,000. We were wondering if we should pay off the mortgage or split it and put $100,000 into each of our super funds? Or should we buy an investment property inside or outside of a self-managed super fund? Collectively we have about $400,000.

You have set me a terrific challenge and I know there are lots of people like you who have exactly the same questions, though not all of us are lucky enough to get a $200,000 windfall in our 40s, just when the kids get off the payroll! Over the years, we have looked at paying off the house or throwing the money into super for many of our clients, and often the numbers work out pretty close to line ball, but it can vary widely when you look at different goals and variables such as income to be earned, time of retirement, size of the mortgage and even the likely returns from the super fund. For example, if you were a conservative super trustee, the figures of future returns in super can be very different to someone who is a thrill-seeker. The cost of the fund to you the trustee can play a role as well, and so can the location of your house. Places like St. Kilda have had great capital gain while other areas have had a lot less, but future gains don’t always follow past trends. As a rule of thumb, I like to pay off the house as it is very tax-effective and it can provide peace of mind. Also, over the next five years I think interest rates rises could spike as inflation could surface because of the excess money supply from central banks right around the world. That said, this works better for someone who’s happy to sell their house when they retire if their super balance is not big enough. If you love your house and never want to sell it, then building up super might be a better idea and simply pay off any balance on the mortgage out of your super by tapping into a lump sum. In reality you should go to a trustworthy financial planner to help you run the alternative tests and make sure they don’t work for a bank as they might be biased towards super products rather than paying off the house. When you have complicated money and life choices, I think you need professional help. On the self-managed super fund question, you certainly have enough money to make it work, but as a planner I would like to know what funds you are in, how have they performed, what do they charge and are you suited to running your own fund? Once again, your personal circumstances will help a good planner determine whether you should buy an investment property in the first instance, and secondly whether it would be better to do it inside or outside of a self-managed super fund. As you can see, you are the classic couple and at the right age to get some reliable financial advice from a professional. Sometimes it can be false economy to, say, save paying $5000 for a great financial plan and miss out on hundreds of thousands of dollars that can come from sound advice.

Published on: Tuesday, September 17, 2013

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