Advice on retirement investing.

I have a close family member in their 60s who has decided to sell their house and business, pay off their mortgage and retire.

They have decided they don't want to have a mortgage and after paying it off and buying a new house they will have about $600K to invest and support their retirement. I calculated a budget for them which came to requiring about $650 a week or $750 pre tax. So that works out they need to make about a 6.5% net return on their investment to live comfortably.

I have been running through a few scenarios with them.

1. Buying rental properties in high rental demand location (non mining town).
   
   
2. Investing in a high dividend return etf.
   
   
3. Investing in commercial property.
   
   
4. Buying a property and turning into airbnb in a tourist location.
   
   
5. use the money as a deposit to build a duplex or triplex to maximise rent in a high demand location which should give a high even after paying off the mortgage.

They are against getting another mortgage, though I started to try to explain the value of leveraging debt. They also don't want to do much work, if any. So they are thinking commercial property may be the go.

I live in a city with a bit of a rental crisis and I was telling them in my calculations their are ways to get quite a high net return that may trump commercial property.

Considering their goal is to maintain that return, and probably have it increase with CPI, what opportunities or pitfalls might I be missing?

Are their advisers who deal in this sort of thing and don't just try to sell you on their product for a commission?

 

What about aged pension and/or drawing down on the 600K?
No Super? Some out their business assets into super.
Tax free super pension in low risk assets is a more typical plan.
Buying property or having mortgages in retirement is not usually desirable.
often you don’t qualify anyway.
Low risk, low debt, low stress, and 0 tax approaches preferred.
the options sound more like a plan for a 40 year old.
Keep in mind expenditure for years 60 to 70 will be higher than 70 to 80 and 80 to 90. There are also many benefits when you qualify for aged pension even if it’s only a small pension. Many structure their assets to qualify.

 

As much as maximizing the yield from the capital is important... I would think at that life stage having access to draw down on the capital if required would be an important consideration....

e.g. what happens if they have an extended vacancy with a commercial property or then have a cashflow deficient with residential property?

 

Very few high div yield ETFs perform better than the index over time. So there may be just as good an argument to get an index fund and sell down. Overall though it is very difficult to make the case that any equity based portfolio is sufficiently defensive.



Advisers are good at charging fees.

 

Is this assuming no eating into of capital and no pension or super?

 

Commissions were banned about 15 years ago for financial products other than insurances

 

That would explain my visit to a planner 15 years ago

More seriously, I misspoke, I meant fees. I just don't think the fees would be worth it for that amount of money.

Advice is surely going to be some variety of:

Consider continuing some work, diversify, keep a decent chunk in cash or term deposits, buy a cheaper ppor.

 

Based on the information provided option 2 seems right up there alley.

 

For me it is not the time of life to be taking on debt or risk. Option 2 for me.

 

Am I crazy or is Option 2 not a bit risky too and require ongoing judgement. At that point in life and if you are needing to do a budget for them, I'd say they should hand over the reins to a superannuation fund. On that note, waiting to 65 and doing 300k of downsizer contributions might be a good way to go. If they are quite early in their 60s they might be able to just do 110k of non concessional contributions each year.

 

Get something that you can put a granny flat on - good and stable income source.

 

How do they assess the proportion of the property when it comes to the pension. I know you could ask for cash but then the tenant would have a lot of power over them.

 

That was my thinking. But I just realised that they can claim the pension in a year and a half so I need to factor that into the calculations.

 

Option 2 would be the closest option for me based on their stage of life and what their risk appetite seems to be. I would not get caught up in hight dividend yield at the expense of growth though. Also rather than paying off the mortgage, why not recycle that debt to get a larger pool of equities. They will never get that loan facility back again once their income dries up.

 

Possibly you are. I didn't comment on the structure, just the income source.

 

Just a suggestion on contributing to that 6.5% income needed.

It is part of our retirement but we don’t have a pension involved.

 

While skepticism about financial advisors are justified, given all the issues/ considerations identified by PC members above, I would definitely seek independent professional advice in this situation. It can be just one-off, fee for service, engagement without any ongoing commitment and OP can help implement the advice.

 

What does the person actually want to do?
Consider their comfort factor.
Do they want a “hands on” or “hands off” investment?

Property investing is not for everyone, and $600K is not much capital to start with, even assuming they can get a loan if retired.

Assuming they have owned their house for 10 years, they (or each) could maximise contributions into a good super account (downsized and voluntary) and invest it within super in their investment choice.

Factor in pension entitlement and age accessible. Even a single person with assets of $600K should receive close to the age full pension.

And please don’t take this the wrong way, but have they actually asked for your assistance? Someone in their 60s who has run their own business is probably well able to make their own decisions.