Selling property for Super or shares in retirement

Should I sell my investment property to invest in the share market? Should I sell my home to get a bigger passive income portfolio for retirement? Should I make a lump sum contribution to boost my Super?

These are three of the most common questions people ask themselves – or us! – when they’re planning for retirement in Australia.

Note: I’ll be using phrases ‘ETFs’ and ‘shares’ interchangeably in this Rask guide. Why ETFs? Most people know ETFs are a far better way to build a retirement nest egg than picking one stock at a time (it’s believed over 2,000,000 investors have bought ETFs in Australia!). If you’re confused about Exchange Traded Funds, read on because I’ll explain it all – or take our free ETF Investing Course (opens in new tab).

Retirement benefits of shares and ETFs over property

There are a few key benefits of using shares (or ETFs) rather than property in retirement. The benefits of holding more shares in retirement include:

1. Shares/ETFs are more liquid: meaning you can buy and sell quickly, and in smaller amounts. For example, you could sell $1,000 of shares to help with Christmas presents later in the year. You can’t sell the shower head at your investment property without someone noticing!
2. ETFs are lower cost: whether you’re investing through the largest Superannuation fund (e.g. AustralianSuper), a self-managed Super fund (SMSF) with Rask Invest (our service) or doing a DIY retirement in your own share brokerage account (e.g. in Commsec), a sensible portfolio of ETFs and index funds should have extremely low ongoing costs (far less than 1%). Compare that with property, where you’ll have maintenance, land tax, and more. Since your retirement balance is what will provide your income, every fee is eating into your… food bill! We believe an ‘all in’ fee of 0.75 – 1% is reasonable.
3. ETFs don’t need air conditioning: unlike tenants (or a real estate agent), your shares won’t call you at 7pm on a Saturday night telling you the AC broke. You wake up, you see the kids, you go to sleep. The shares do their thing. No questions asked. Your financial life is just… simpler.
4. ETFs pay a higher passive income than property: I’ve found time and again that a well diversified portfolio is far better suited for retirement than property simply because it pays more income. And, yes, it should still grow. Better yet, Australian shares (and ETFs that invest in them) will pay some tax effective franking credits.
5. ETFs are more diversified: a boring ETF that invests in the S&P/ASX 200 owns 200 shares. Some shares are good. Some shares are great. Some shares are not good. Some shares are horrible. But since you own 200, you’re diversified with just one ETF. And the winners outweigh the losers (that’s why share markets go up over time).

There are many more reasons why ETFs/shares are superior for retirement portfolios (or when building them) but it’s worth remembering that property has one key advantage over shares: it’s easier to use debt on residential property.

However, most retirees want to get rid of debt, not keep it, so that could be a pro or a con.

Best passive income portfolio for retirement

When you’re investing for retirement, a great retirement portfolio provides consistent and sustainable passive income. Sustainable means it must also grow because if it doesn’t grow, as inflation ticks over, you’re actually going backwards.

While you don’t want a job managing tenants. And you definitely don’t want lots of debt attached to single assets (which can ruin your nest egg and may even impact pension payments or Super balance rules). You also want a portfolio that can grow. Because even if you retire at 65, you’ll probably live for another 20-30 years. That’s a long time without a wage.

In my opinion, the very best passive income portfolio in retirement is:

• Simple
• Minimises risks through diversification
• Runs itself
• Has low fees and
• Grows slowly over time.

A lot of retirees I deal with (especially around what I think is the risky age of 50 – 65) come to us and want us to review the ‘biggest yielding stocks’, commercial properties, weird debt investments (sometimes called “private credit”), exotic managed funds, or hybrid securities.

These might seem tempting, but a key rule of anyone’s portfolio should be that you must understand what you’re invested in. Otherwise you risk losing sleep and that has other consequences. For example, I’ve spoken to people who have not taking a family holiday – out of fear they don’t know if they can afford it (hint: they definitely could!).

Why not just keep using property?

According to data from SQM Research, the average gross yield on houses in Melbourne (that’s before expenses, interest costs, maintenance, and agent’s fees) never once went sustainably above 4% between 2010 and 2024. Again, this is before all of the costs.

Conversely, according to data sourced from Market Index, the Australian share market spent the majority of that same period over 4% – before factoring in the positive impact of franking/tax credits.

The Vanguard Australian Shares Index ETF (ASX: VAS), a low cost ETF that simply tracks 300 shares on the Aussie market, returned 7.95% net of fees in the 10 years to 31 July 2024.

In other words, the average yield of the share market is far better than the average yield on Australian property. And it requires no debt to achieve it. No maintenance. No tenants. No property managers.

So having at least some shares and ETFs in your retirement mix is a no brainer.

You can refer to the Rask Invest website, and in particular our strategy called, Retirement Passive Income Core (50/50) – Terra, to see what we’re invested in.

Benefits of adding money to Super

One of the most obvious reasons to sell a property (aside from those darn land taxes!) is to contribute the net proceeds from a property sale into a Superannuation fund for the tax benefits.

Super is not an investment, it’s a tax structure. For example, a Self-Managed Super Fund (SMSF) can hold exactly the same ETFs as any of us. The only difference is where it’s held and how it’s taxed.

There are many reasons why you might want to add money to Super, instead of keeping it in property:

1. Tax Efficiency: Super is a tax-effective investment vehicle. Investment returns inside superannuation are taxed at a maximum rate of 15%, and this rate drops to 0% in the retirement phase (subject to any upcoming changes). This can result in significant tax savings compared to holding investments outside super. But it does have more than a few catches (see below).
2. Tax-free income in retirement: For those aged 60 and over, withdrawals from superannuation are normally tax free, which provides a more tax-efficient income stream in retirement. There are rules around this, but the general gist is that the income from Super is typically the best people can get (for now).
3. Flexibility and diversification: Moving money from a property into superannuation or an SMSF allows individuals to diversify investments, rather than (typically) having one or two properties that are subject to all types of risk. By diversifying across markets, asset types (e.g. shares, bonds, cash, etc.), investors can manage risk and provide a more balanced income stream. Whether interest rates and the economy are going up or down.
4. Estate planning: while this isn’t a ‘benefit of investing via Super’, it’s definitely a benefit for the Rask community of investors who think about their family and kids. Superannuation can be a useful tool for estate planning because you money can be paid to beneficiaries, often with unique tax treatment, compared to assets held outside super. It’s also relatively easy to get started on this aspect of your financial life, since the Super rules are standardised (ask your Super fund about binding death benefit nominations).
5. Access to Downsizer contributions: Downsizer contributions provide a unique opportunity for older Aussies to boost their super balance significantly by selling their home in favour of providing more funds to generate income in retirement. There are rules, see below.
6. Potential for growth, protection and income: within a large Super superannuation fund (e.g. inside your Super fund’s member portal), there are different investment options. But even the ‘default options’ enable your money to be invested in income-producing and growth-oriented investments at the same time. The structure, the rules, access to certain investments, and the long-term focus of Super can help protect against market volatility and help less experienced investors avoid common mistakes (like being scared by the news and selling investments when the market is down… or going up!).

Of course, it’s pretty well known that Super isn’t perfect and a lot of people like to be more hands on, even if that’s with the support of a professional investment service (like Rask Invest or an adviser).

Hence why there are now over 600,000 Self-Managed Super Funds (SMSFs), according to ASFA’s statistics.

A warning for SMSF investors

We find that the majority of SMSFs which invest with us at Rask Invest were opened after getting financial advice and after some prompting by a financial planner or accountant (or a property spruiker, but they’re in a different league).

The thing is, when the client (that’s you) no longer wants to deal with that adviser, they’re left to ‘go figure it out’ on their own. This can be a scary time.

At Rask, we don’t set up SMSFs, but a lot of SMSF trustees turn to Rask Invest because they trust us to keep their life simple, we provide the tax reporting to their accountant (as part of the investment), they seem to like our simple fees, admire the full transparency and investment simplicity.

In summary: our service works well with SMSFs because of the flexibility and control they provide to investors. And we love working with SMSF trustees because we believe our platform is ideally suited to simple SMSF investing. And, of course, we get a small ongoing fee. However, we’ll be the first to tell you: if you run an SMSF completely by yourself, it can be a hassle, especially if you start adding complex investments.

Book a free call to see how we work with SMSFs to build a retirement ready portfolio from day one.

Pro tip: try to separate the Super advice you receive to test out the theories from experts. Use an adviser that is independent of your accountant, and vice versa. 

How to contribute proceeds from a property sale to Superannuation

Knowing how to contribute proceeds from property over to Super can be tricky, especially with the constant Superannuation rule changes.

Please be careful, use the ATO website for the latest Superannuation information and speak to your accountant before doing anything. And keep in mind that putting extra money into Super can be risky because the Governments of the past 10 years have proven they’re willing to change (and tax!) just about anything.

Nonetheless, here are some ideas of ways you may be able contribute the proceeds of a property over to Super:

1. Downsizer payment: Individuals aged 55 and over may be able to make a downsizer contribution of up to $300,000 per person ($600,000 for a couple) from the sale of their home into their superannuation. According to the ATO website, the key condition is that the home must have been owned for at least 10 years. The ATO provides a list of eligibility criteria (it’s lengthy). For advice on this, you can ask your accountant to interpret the rules.
2. Non-concessional contributions: “Non-concessional contributions” are contributions made into a super fund from after-tax money (i.e. money in your bank account, which has already been taxed). For individuals under 75, non-concessional contributions have an annual cap, or more, using the bring-forward arrangement – which allows individuals to bring forward two years’ worth of contributions. There are rules, so these can be useful for people with a smaller Super balances (e.g. under $500,000). Check the ATO website.
3. Concessional contributions: proceeds from a property sale might also be contributed as concessional (before-tax) contributions, up to the annual cap (e.g. generally one-quarter of the non-concessional cap). From 1 July 2024, concessional contributions are $30,000 per year. These contributions can be made by salary sacrificing from your employer, or as a tax-deductible contribution from an individual.

As of August 2024, most of Rask’s investors choose our higher growth option, High Growth Core (90/10) – Jupiter. I assume they do this because they know they can switch investment strategies at a different stage of life (e.g. to Martian, then to Terra), and they probably hold plenty of cash or investments outside of the portfolio we manage for them.

Downsides of contributing to Superannuation

There are plenty of reasons why people don’t contribute extra amounts of money to Superannuation. Or will choose to contribute some money, but not everything.

Here are some of the reasons why contributing property sale proceeds to Super might not make sense:

1. Limited access: money inside superannuation is generally “preserved” until the individual reaches preservation age and retires. This limits access to the funds. This lack of flexibility, especially with larger funds (Industry Funds and retail funds), can be a drawback. Adding money to any Super fund can also be a significant downside if unexpected financial needs arise before retirement, or if someone wants to retire early. Typically, a good financial adviser will instruct you to invest some outside of Super and some inside. Younger (i.e. under 50) should think very carefully before committing everything to Super. While it may be a fantastic investment option (especially for smaller balances), the Government seems to be becoming much more heavy-handed with tax rule changes, caps, limits on transfer amounts and so on. Key point: even if your Super balance isn’t close to the balance transfer caps now, keep in mind that it will likely keep growing.
2. Contribution caps and penalties: There are strict rules and caps on how much can be contributed to superannuation each year. Exceeding these caps can result in excess tax and additional penalties, making it important to plan contributions carefully.
3. Investment risk: Superannuation investments are still subject to market fluctuations, so this applies to any investing. While diversification can mitigate some risk, there is still exposure to market downturns, which can affect the value of superannuation savings. SMSFs have more control over their choices, since it’s ‘self managed’. But they often require professional guidance.
4. Complexity: while using an Industry Fund (like Australian Super, Hostplus, Cbus, etc.) is pretty straight forward and very easy to manage, making your own superannuation investments, especially within a self-managed super fund (SMSF), can be complex and requires time and expertise. Ongoing compliance and reporting requirements can also be a burden.
5. Superannuation rule changes: Superannuation is subject to government regulation, and rules around contributions, tax treatment, and access can change, potentially impacting retirement plans.

For more detailed and specific information, it is always recommended to consult directly with the ATO website, your accountant or a financial adviser.

As someone with plans to retire early (or simply ‘on my own terms’), I’m building my core portfolio outside of the Super environment. I’m using Rask Invest, plus my business, some high conviction shares and other investments (all types of weird and wonderful things). These are held in my own name, a company or (more commonly) our family trust. However, I also contribute to Super to cover my insurance. This won’t be suitable for everyone, but it’s how I am doing it.

My general advice

Selling a property to invest for passive income in retirement is pretty daunting, especially if you feel rushed or lost trying to find “the best option”. As you can see, all of the options have risks (even the simple one of letting a big Super fund manage it). So it’s about educating yourself enough to know what’s right for you and your family and being slow to act.

I think that choosing to park extra money in an Industry Super fund can be a great idea for people with lower Super balances, those who feel they don’t have the money to see a financial adviser (tip: speak to your accountant first!), or for people who just want the simplest option.

So, my advice is to slow down. Breathe in.

Listen to some Rask podcasts (free), watch our weekly portfolio walkthroughs and ask questions (free), book a free call with our team at Rask Invest (free), speak to an adviser (normally $4,000 – $15,000 for holistic advice) or call your accountant to speak about the tax benefits of Super (probably a couple hundred bucks).

For Rask Invest, which is the investment service that lets my team and I invest in ETFs on behalf of our community, we find that a lot of people want to add money to Super/SMSFs because they understand the tax benefits.

However, most of the Rask investors I speak to also want to have at least some of their money outside the Super environment – I’m one of these people! 

Thanks to the power of ETFs, it’s now easier than ever to build a great portfolio outside of Super and get expert guidance to do that, without debt and without property.

So the next time you say to yourself, “should I invest inside or outside of Super?”

Remember you can do both. And probably should.