People looking to create wealth often start by digging into the minutia of different investments. This can become a bit of a rabbit hole as an endless amount of information is available on all the different types of assets.

Wealth creation is like a game where you try accumulating as many assets as possible. The plan for how best to do this will differ depending on things like your age, your income and how much you spend.

If you are 5 to 10 years away from retirement, borrowing to invest may not be appropriate for you. For many people, this rules out residential or commercial real estate unless they have substantial amounts of money with which to invest. Depending on your income, if you are 5 to 10 years away from retirement, trying to put as much into super (which is basically just a tax haven) may make more sense.

However, if you are 10 to 20 years away from retirement and have a good income that allows you to save, borrowing to invest could be an excellent way to fast-track your wealth creation. Also, if you’re looking to retire before you can access your super, investing outside of super may be more appropriate.

Here are two examples of strategies we have put in place for clients recently.

Client 1

Background: couple, 56 years old, small mortgage, investment property with $600,000 in capital gains, $350,000 in super each, combined income of $230,000 before tax, wanting to cut back on work now, and retire in eight years’ time.

Create wealth the right way

Strategy: sell the investment property, make additional carry-forward concessional contributions to super to reduce the capital gains tax, pay off their mortgage, use the bring forward non-concessional contributions to put as much as possible into super, change the investment options in super to a mix of passively invested Australian and International shares (reviewing this as they get older), and then every year continue to maximise their concessional contributions into super.

Outcome: They will be able to reduce work now, have enough in super in the next six to eight years to stop work completely and draw a pension from their super that will allow them to lead a comfortable life forever. Simple but effective.

Client 2

Background: Couple, 38 years old, fully offset mortgage, $150,000 in super each, one partner earning $500,000 a year and the other not working, wanting to upgrade their family home and build wealth.

Strategy: Invest through a structure that provides asset protection and tax benefits. Borrow to upgrade their home and debt recycle at least $100,000 each year to reduce the non-tax deductible mortgage as soon as possible. Contribute $200,000 (to their investment vehicle) in the first year and then $100,000 each year after to invest in property and Australian and international Exchange Traded Funds (ETFs). In year one, they will use the $200,000 as a deposit to buy an investment property, and then in year two, they will use the $100,000 to buy ETFs. In year three, they will buy another investment property; in year four, they will buy more ETFs and repeat this for the next 12 to 15 years.

Outcome: they will live in the house they want; they will have enough assets accumulated in the next 15 years to provide them with a passive income of around $150,000 for the rest of their lives.

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About the Author
Phil Harvey is an independent financial adviser. In 2017 Phil set up his company Construct Wealth to help clients best manage their finances so they focus on what is important to them. He is a founding member of the Profession of Independent Financial Advisers.

General Advice Warning
This advice contains general information. It may not be suitable to you because it does not consider your personal circumstances. Phil Harvey and Construct Wealth are authorised representatives of Independent Financial Advisers Australia (AFSL 464629)

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