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Can property really fund your retirement?

Reported by Barbara Messer
Thursday, October 1, 2009
Can property really fund your retirement?
Can property really fund your retirement?

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This story is the third in a three-part series on property and retirement.

by Barbara Messer

At the ripe young age of 31, Jessica Leigh is already planning her retirement thanks to a property acquisition strategy that should — hopefully — enable her and husband Andrew to retire within 20 years.

"By the time we're 50 we hope to own eight properties, and we should be comfortable enough to retire. We'll sell a couple of properties and live off the capital gains, while earning rental income from the other houses in our portfolio," Leigh says.

The couple has mortgages on an apartment in Randwick, Sydney, as well as three investment properties in Queensland purchased in 2005, 2007 and 2008.

"Our strategy is to acquire property as often as we can in areas we think will increase in value, so we can use that equity to borrow more money and buy more properties," Leigh says.

It's a potentially risky strategy given that house prices are volatile and the Leighs are accruing more and more debt every few years. But if it goes to plan, the couple could enjoy financial security for the duration of their retirement.

According to the Westpac ASFA Retirement Standard, a retired couple needs to earn more than $50,771 per year to live "comfortably", or more than $27,000 per year to live "modestly".

Can a sound property investment strategy really deliver enough financial security to live happily ever after?

Strategy one: build a property portfolio

Like the Leighs, many investors use the equity in their family home to buy one or more investment properties, relying on capital gains and rental income to fund their retirement.

"But there are definitely risks to this strategy," Leigh says. "You need tenants who pay their rent on time and don't damage your property, and on top of the mortgage repayments, you need to spend between $100 and $200 per week per property on maintenance costs. If Andrew or I lost our jobs, we'd really struggle to meet our interest repayments and we could be forced to sell one of our properties at a loss."

  • Tips for choosing an investment property...

    Strategy two: diversify

    A less risky strategy might be using the equity in your family home to obtain a loan for shares, fixed income, bonds, managed funds, property funds or superannuation.

    Downsizing is another solution: selling the family home and moving to a smaller, less expensive apartment, house or retirement village, using the leftover money to invest elsewhere.

    "Property should play a big part in anyone's asset portfolio but it's not wise to put all your eggs in one basket. The general rule is: diversify," says Wilson Luna, financial planner at FSP Group and co-author of Your Family, Your Money with wife Ana Laura Luna.

    Rental yields average 2.5 percent to 3.5 percent in many suburbs, which is less than a high interest term deposit, which means property investments are not as dependable or lucrative as many people might think, Luna says.

    "There is validity behind every asset class — where you invest depends on individual circumstances, but generally, investing in just one asset class is dangerous," he says.

    Strategy three: manage your super

    Rental income may be taxed at a higher rate than superannuation, so it's important to understand taxation laws and make the most of superannuation tax concessions.

    It's possible to set up your own super fund and acquire property via your fund. This means capital gains or rental income will be taxed at a lower rate, and if you're more than 60 years of age and retired, this income is tax-free.

    "It's important to speak to a financial adviser to ask, 'Is property the right asset to fund my retirement?' and if so, 'Should I own the property in my own name or through a super fund?'" says Craig Day, senior technical services manager at Colonial First State.

    "Property is an important part of any diversified portfolio, but it's got advantages and disadvantages. With property, you incur capital gains tax, stamp duty, real estate fees and high entry costs, so it might be better to generate returns from your super instead," Day says.

    Strategy four: reverse mortgages

    Also dubbed "SKINS" — "Spending the Kids' Inheritance Now" — reverse mortgages allow retirees to borrow against their house, and repay the loan when they move, sell or die.

    It's an attractive offer for retirees who have put their life savings into a single asset — their family home — and are asset rich, but cash poor.

    But there are risks involved. A 2007 investigation by consumer group Choice found that some lenders were encouraging retirees to borrow more than their house is worth, which can result in complications with the estate you leave behind.

    As is always the case when signing complicated contracts: read the fine print!

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    Strategy five: start now

    You might be in your twenties and fit as a fiddle, but that doesn't mean you can't start planning for retirement now.

    "Nothing builds wealth more than time," Luna says. "A lot of wealth is simply generated over many years through compound interest. Retirement strategies are all about investing money wisely over the long term. If something sounds too good to be true, it usually is."

    With rising living expenses and an ageing population, Australians should start planning for their retirement as early as possible, leveraging the equity in their property investments to optimise financial security for years to come.

    That way, if you develop a penchant for hot-air ballooning at the age of 85, you'll have the costs covered.

    This story is the third in a three-part series on property and retirement.

  • Part 1: Making the most out of your nest egg...

  • Part 2: The emotional costs of selling the family home...







  • 26/10/2014 09:04Sydney, Australia. 26 October,2014
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