PLANNING FOR A PROSPEROUS RETIREMENT
1 March 2018
Most Australians only have a vague idea of how much they’ll need in super or investments for a comfortable retirement. An even greater mystery is how big your property portfolio would need to be if you were to rely on it (or at least maximise it) for income when you stop working.
Naturally, everyone’s financial position is different, as is everyone’s idea of a ‘comfortable retirement’, but for most, it will be more than $60,000 per year (taking into account different tax concessions and other discounts for retirees).
Danielle Cahill wrote in realestate.com.au that a good estimate to follow is ‘The 25 Rule’: Firstly, figure out how much you think you’ll need per year in retirement. Then multiply that figure by 25. This is what you’ll require in income-generating investment, assuming a 4% return per annum.
The key here is income-generating, which will likely exclude your normal residence (unless it is somehow yielding 4% return over and above capital growth). So let’s say you decide that $60,000 per annum is enough to enjoy some comfort in retirement, your investment portfolio would ideally be around $1.5 million (i.e. $60,000 x 25 = $1,500,000). In today’s market, that’s one or two established homes in Melbourne, or probably two or three fairly standard apartments – all tenanted. And of course, accepted wisdom tells us that, like any investment portfolio, it is best to diversify. You’ll also need to factor in maintenance expenses, management costs, council rates or corporation fees, landlord insurance and interest payments and tax (though negative gearing can offset some costs).
It is also possible to earn an income off capital gains – even without selling the assets – as a recent article in onproperty.com.au explains: “As property values tend to double every 7-10 years then (if you own multiple properties) you can retire by drawing on the equity in your existing properties. Each year you obtain a new equity loan from the bank to cover you for that year and the next year you get another loan to pay for your lifestyle that year.”
Alternatively, you could build a property portfolio while you’re working, and sell them in retirement, to live off the returns – remembering to factor in any Capital Gains Tax liabilities you’re likely to incur. Acknowledging its potential, property investment for retirement is also finding support from unlikely quarters, as the Industry SuperFund-backed ME Bank recently pointed out: “We’re increasingly being encouraged to fund our own retirement, and while superannuation is specifically designed for this purpose, it’s not the only investment that is well-suited for a retirement nest egg. A rental property can offer considerable pluses for retirees…”
Why turn to real estate?
Traditionally, Australian real estate, especially in Victoria, has experienced healthy growth over the years, and, while there is always talk of a property bubble (a theory that has actually been circulated since 2010) the sentiment remains that prices will continue to rise and property will remain a growth sector, with greater reliability than other equities. As long as your properties are fully tenanted, rental income is much the same as salary income – regular, fixed and likely to keep pace with inflation. Negative gearing can offset the costs of mortgage repayments, but logically, only while you’re paying interest. Once your properties are fully paid off, expect a bigger tax bill. Speaking of tax, investment property can also be used as part of a Self Managed Super Fund, bringing with it all the tax advantages that SMSFs benefit from.
Start early. Like any investment, the sooner you start out, the more likely you’ll be set up and ready for a comfortable, debt-free retirement.
Have a chat to an accredited financial planner about your property ambitions and determine how much you’re willing to give up now, while you’re working, to enjoy doing what you love when the time comes. You may find that it’s easier than you expected.
All material in this article, and the links provided, are for general information only and should not be taken as constituting professional advice from RT Edgar Pty Ltd or any of its associates, employees or contractors. RT Edgar is not a financial advisor. Before making any changes to your financial arrangements, you should consider seeking independent legal, financial, taxation or other advice to determine the best course of action to suit your unique circumstances.