Retirement Plan - Property

Good point but weren't there many boom and bust cycles in the last 30 years?

In my opinion id say it's fairly safe that in the next 30 years houses in Condell Park would be worth more then $1.5m

 

does it really matter? whats important is your timeframe for financial freedom and where you are investing today to achieve end goal. If we look at any area with regards to property it will all look good, but who has 30 years

 

I understand what you are saying and thanks for the detailed scenarios. Plenty to think about. Cheers.

 

Well done in paying off your PPOR. This puts you in a great position.

I am 60, retired and have been so for 5 years. It seems I have a different attitude to debt than you. To me, debt is a very useful tool if it is good debt (used to buy a growth/investment asset) and it is controlled/managed. I have more debt now than I have ever had in my 60 years. By the same token, I have more growth/investment assets and more passive income now than I have ever had in my 60 years.

I am not in a similar position to you but I am guessing that I am in a position that you would like to get to. I believe you need to start with the end in mind. The first question you need to ask yourself is "How much income do I need to support my desired/chosen retirement lifestyle?"

The experts say that a couple needs $34,000pa in after-tax income for a modest lifestyle and $59,000 for a comfortable lifestyle. These numbers assume one owns their own home (which you do) and are in today’s dollars. After working my butt off for 35 years, I wouldn't be happy for a comfortable lifestyle in retirement. Why should one? I budget for something better, namely $84,000 per year (or $7,000 per month) and this doesn’t include perks such as overseas holidays, etc.

Taking the comfortable lifestyle figure and say inflation averages 2.5%, one would expect comfortable lifestyle figure will be $75,500 in 10 years’ time and $85,500 in 15 years’ time.

You haven't given us a lot of information. For example, we don’t know your age (guess it is around 45 to 50), how long before you would like to retire (guess it is in next 10 to 15 years), your salary, the prospect of your salary increasing over time, your super’s annual return, your other investments, etc, etc.

We can make some assumptions and then leave it up to you to stress test your situation. If we use a figure for your annual salary, say $100,000, assume it grows at the rate of inflation, say 2.5%, assume you make super contributions at the current SGC rate, assume your super grows at say 12%pa (growth of 7% to 8%, after-tax income of 4% to 5%), then one would expect your super balance would be around $1.4M in 10 years’ time and $2.6m in 15 years’ time.

On this basis, a comfortable lifestyle would consume 5.3% of your super balance in 10 years’ time and 3.3% of your super balance in 15 years’ time. This indicates to me that you will probably be eating into your capital from Day 1 of retirement if you retire in 10 years (not a good thing) but, in 15 years, it is very doable (in fact, the Government will force you to take 4% if the rules stay as they are).

To buy two properties today for say $350k each, I would imagine you are looking at outer metro or regional areas. If we assume growth of say 4% and yield of say 7%, then in 10 years’ time, they are likely to be worth just over $1.0M and gross yield would be $72,500. Typically, one loses 25% to 35% of their gross yield in property expenses (rates, insurance, etc); hence, one would expect your before-tax income would be around $47,000 to $54,000. Assuming that the tax free threshold for a couple stays at $36,000, one would expect that very little tax would be payable once one takes into account depreciation.

I would suggest you consider buying two properties today for say $600k each in middle-ring metro. If we assume growth of say 6.5% and yield of say 4.5%, then in 10 years’ time, they are likely to be worth $2.2M and gross yield would be $101,500. Hence, one would expect your before-tax income would be around $66,000 to $76,000. In this scenario, one would have borrow more and assuming negative gearing is still allowable, one could incur $30,000 to $40,000 in interest charges and depreciation and still pay no tax (assuming that the tax free threshold for a couple stays at $36,000). But you end up with twice the asset value.

None of the above is financial advice. I am only trying to demonstrate different scenarios and the possible outcomes. I trust this gives you a good idea on how for create your own scenarios, plug in your actual numbers and stress test your scenarios. Good luck.

 

We would love to but to be honest we are scared of the next 10-15 years. We are not young anymore. Yes we hit the small (cant really say big) 50 next year. It's not easy now to get up for work every morning let alone years later.

It's a huge gamble now to borrow lots of $ either in smsf or personal debt. It's nice to believe that we can control/manage but we had not been lucky in the past. Telstra II shares back then for example. Had not been lucky with property either.

Thank-you for sharing your fantastic experience. Really glad that it has been working for you. We def will consider everything. Cheers

 

Buying 2 properties at $350k each at 50 and going to work every day for the next 10-15 years whilst paying the shortfall on costs and hoping for capital gain sounds like my idea of hell. Personally, if I was in your shoes (not knowing how much equity you have) I'd sell the Sydney ppor and relocate somewhere where the ppor equity will buy a modest, but nice home and at least 1 ip or other investment vehicle that covers your living costs if nothing else.

 

PS. Those of us that have seen a crash will tell you that you could buy the 2 ips at $350k each and pump money religiously in for the next 10+ years paid for by your work only to find that they're worth less than you paid for them.

 

OMG.... I can not quite fathom some of the "guidance" being offered... like consider buying 1.2M in property... I realise it's well intentioned but I'm not too sure the OPs situation is being duly considered.

@ttn congrats on owning your own home! Protect that asset! Others may suggest leveraging the equity (which can be beneficial) however please contemplate that carefully considering how long it's taken you to achieve & the limited time you have to recover if things don't go to plan.

Your super balance can be significantly improved now that you have no mortgage payments & since you're almost within sight of using it, would be a great place to consider putting some of that extra disposable income.

As for buying an IP, that's a great way to build equity & have another asset to use down the track. Even a 200k-250k IP would greatly improve your financial position in 10 yrs & it's much easier to get into. It would also allow extra contributions into super along the way, saving a cash buffer &/or saving for IP #2 down the track. We can't all jump into 600k IPs & nor do we need to.

Good luck. Read, learn & ask plenty more questions whilst you save & determine "your" path...

Enjoy the journey

Indi

 

Good advice.
But it can be hard to find solid employment in other areas.
Shouldn't be scared of taking the leap though.

 

Agree, but I've found that employers in many very liveable regional areas can't recruit staff for love nor money. Living can be extremely cheap and enjoyable in some of these places. Plus, if your equity can pay for a ppor and 1 or 2 ips you may not need to work, or at least can work very part time. Massive difference to your overall lifestyle and standard of living.

 

Yeah, there's areas at the South Coast that are growing pretty quick.
I always wonder, where do all of these people work?

 

Being scared normally means one has a fear. As someone smarter than me once said “FEAR is False Expectations Appearing Real”. Typically, fear is caused by a lack of knowledge/experience or the wrong knowledge/experience. When it comes to property investing, there is a tremendous amount of knowledge and experience on this forum. I trust and pray that you use PC to overcome your fear.

As I stated in Post #24, I am 60 and I consider myself still young. My mother is nearly 88; so I am hoping I still have around 30 years of living ahead of me.

You are more than 10 years younger than me. In 2004 when I was 48 and my wife 49 (that is, we were basically the same age as you are now), we bought two houses in Brisbane for around $300K. They were our second and third investment properties (so we were relatively newbies).

Today (12 years later), they are worth around $600K. Both their loans have been paid off and these two properties generate net income of nearly $35,600. If this was our only source of income, it would be tax free. A great supplement to our self-funded pension. This is what I was alluding to in Post #24.

The thing I really like about investment property is that the longer you hold them, the easier it is to hold them. Our first IP was bought in 1992. Today, it is returning us 18.5% of what we paid for it. We borrowed the full purchase price. Today, that loan would only allow us to buy about 20% of the property.

Yep, investing is a gamble as there are risks. But life too is a gamble as there are risks. Just as we get nowhere in life without taking risks, the same applies to investing. The secret to life and investing is to manage those risks.

Even safe investment can be risky. A couple close to me (and a year older than me) moved all of the smsf funds from shares/managed funds to cash as a result of the GFC. They were concerned about losing some/all of their capital. Some may see this as a safe, low risk thing to do.

But the really scary thing (from my perspective) is that these funds are still in cash today.

I don’t know what their fund balance is but let’s say it is $500,000 (I doubt if it is even that much). If we run a scenario where they earn 2% interest on their funds and assume they only take enough self-funded pension to support a modest lifestyle ($34,000), their super fund will run out of money before they are 75. Even if the balance was $850,000, their super fund will run out of money before they are 85.

If we re-run the same scenario and assume they take enough self-funded pension to support a comfortable lifestyle ($59,000), their super fund would run out of money before they are 69 if the balance is $500,000; it will run out of money before they are 75 if the balance is $850,000.

Yep, they will be relying on the Aged Pension to supplement their super.

 

My idea of hell would be to spend 20 to 30 years living on the Aged Pension, with no PPOR and no investments .

If I was @ttn, I am not too sure I would be doing that. I know we don’t know a lot about their personal circumstances but:

1. What if the OP and/or their partner have parents in Sydney and are close-by? These parents would be 70+; one thing I know from experience, as parents age, they reply more and more on their children for assistance/support with their personal life, their health and their finances.
2. What if the OP has children in Sydney and are close-by?
3. What if the OP’s children have children? One thing I know from experience as a grandparent is the joy of grandchildren.
4. What if the OP has good friends who are close-by?
5. What about the costs of selling, relocating and buying a modest home? This could make a severe dent in their Net Worth.
6. What about missing out on the capital growth on their Sydney PPOR for the next 10 to 15 years if they sell?
7. What about their life infrastructure such as doctor, dentist, accountant, etc. Moving could be re-establishing all of these.
8. ...

Moving is easier for someone in their 20's and 30's. It is a lot tougher for people in their 50's and 60's. Many have made the sea change, the tree change, ... and live to regret it.

 

Can I suggest you re-read my Post #24. In it, I detailed a number of caveats; some I have extracted below:

1. It seems I have a different attitude to debt than you.
2. I am not in a similar position to you …
3. You haven't given us a lot of information. For example, we don’t know your age (guess it is around 45 to 50), …
4. We can make some assumptions and then leave it up to you to stress test your situation.
5. None of the above is financial advice.
6. I am only trying to demonstrate different scenarios and the possible outcomes.
7. I trust this gives you a good idea on how for create your own scenarios, plug in your actual numbers and stress test your scenarios.

So, I wasn't giving @ttn any "guidance". I was suggesting some processes they could use to help them move forward with their decision making. Bit like not giving fish but showing them how to fish.

 

I think the OP needs to do a simple analysis. What is the impact of doing something (ie property investing) or doing nothing. That particular analaysis and decision at the same age and time frame drove me forward. I did not want to just survive in retirement I wanted to live with financial choices. It can be done.

 

Yes people retire on rental income and good for them, but the reality is you can achieve double the after tax income with shares, which is why I expect to have no IPs when I retire and be 100% invested in the stockmarket.

Using example above and assuming a 30% tax rate (even with no other income the shares will get a franking rebate)...
1.2 Million in property .. 35600 net - 30% tax = $25000
1.2 Million in shares at 4.5% average dividend and lets say 75% franked = $50000 (double).

 

Calm the farm... I just reread your post... still can't quite get my around this.

Maybe it's because I'm an immature early 40s bloke that's semi-retired (can stop working if I wanted to) that hasn't even contemplated 600k IPs let alone multiple.... I wouldn't even do this in my circumstances let alone the OPs.

Was not meant to be a personal comment.... just a very different opinion. I hope that's still allowed...

Enjoy the journey

Indi

 

For me, in retirement, passive income is important as that is what we live on. But, I believe capital growth is just a important (and one could argue more important) as the more growth one gets, the more sustainable one's investment portfolio is.

I am not smart enough to pick a winner out of property and shares in the long-term capital growth race. So, our retirement strategy is to have an investment portfolio with net assets of 45% shares/managed funds, 45% in property and 10% cash.

Our shares/managed funds are held in our smsf which has no debt and it pays no tax (at the moment) as we are in pension phase (which funds our lifestyle). Our properties are held in our own name and in trusts with a comfortable LVR of 48% and we aim to have between zero to $36k in net income (so we pay no tax). Our cash is held within our smsf (to pay our pension) and in offset accounts (so we pay no tax).

Currently, investment portfolio is sitting with net assets of 41% shares/managed funds, 48% in property and 11% cash. This 'out of balance' has been caused by lack of growth in the Australian share market this year and good growth on our properties in the same timeframe.

So, in summary, I agree with you (shares generate good income) and disagree with you (we have significant property assets in our retirement portfolio)

 

We have been pretty conservative in home loan debt so far that's why we plan to use super 200k to borrow another 200k to buy a property where rental income should cover for interest and expense costs. We also plan to contribute yearly in GCC Cap so that we can build up even more in our super.

Kierank has suggested to buy a metro 600k property which is workable too. We can use 200k to borrow 400k and use the other 200k to offset interest while saving and waiting for other opportunities. Ironically 600k does not go far enough in Sydney so we prefer to look elsewhere.

We do not plan to sell our ppr due to family/friends. If good health and stable work we should be reasonably comfortable in retirement at 60.

Appreciate all different opinions guys. Cheers

 

Being in shares is not sacrificing capital growth though, historically shares have been about 1% pa better than property in capital growth terms. The fact that it hasnt been this way in Australia for the last 10 years would push me more towards shares, I don´t expect to see much capital growth in most Australian property in the next 10 years, probably be declines in many overheated areas.