The Retirement Planning Strategy Safeguarding Aussie Future’s

A growing number of retiring Australian’s are finding themselves in financial distress and wishing they had safe guarded with a more calculated retirement planning strategy earlier on.

Recent figures from the Association of Superannuation Funds of Australia highlighted fears that most Aussie’s Super balances are below what they would require for a comfortable retirement. This comes as actual data amongst waves of anecdotal evidence that retirees are already feeling the crunch. We are at the beginning of more everyday Australian’s being forced to take their future comfort into their own hands by including an investment strategy in their retirement planning. We are seeing more and more retirees now struggling to get by because they never learnt how to invest in property with little money back when they had the chance.

“Increased Financial Pressure Forcing Stricter Retirement Planning”

The pension age is to be increased to 67 by 2023, but with the dollar stretching less and less everyday, even the extra years earning might not be enough for the majority. Recent concerns are forcing many Australians to look beyond Superannuation to produce post retirement income.

Major factors affecting retirees already that weren’t a factor for previous generations include:

  • 600% increase in average mortgage debt since the late 80’s, with nearly half of all homeowners aged 55 to 64 still paying off mortgage debt. Up from only 14 percent 30 years ago. (Source: Australian Housing and Urban Research Institute)
  • Forecasted increase of 60% for retirees seeking rent assistance by 2031
  • Unbalanced increase in essential living items compared to wages
Essential Items20 year difference
Wages78%
Housing 94%
Child Care97%
Primary School159%
Secondary Education203%
Insurance118%
Water159%
Gas/house fuels179%
Electricity194%
Medical & Hospital195%

The Real Cost Of Living

Many pensioners are already feeling the squeeze and future projections predict the average superannuation fund won’t be enough to secure a comfortable retirement. The exact amount required will vary for every unique situation with anything from $800,000 to $1.6m being commonly quoted when talking about a safe amount when crunching the numbers in your retirement planning.

The graph shows the change in essential items over the past 20 years. Whilst non essential items like electronics and furniture have barely moved or even decreased the items that we can’t avoid are skyrocketing. The numbers are hitting harder on households but are even more concerning for retirees with no income stream and a major concern should they continue to rise at the current rate.

Carol Bernstein forced to consider her retirement planning strategy more closely

How a Good Retirement Planning Strategy Could Protect You

More Australians are feeling forced to develop a retirement planning strategy or risk leaving their retirement in the hands of a finite financial source such as superannuation, living with fear that it may run out too early in a time that you should be able to enjoy the fruits of your hard work. One strategy that could work for you is using investment properties to create an ongoing post retirement income. Many who could have safe guarded their future’s through a careful strategy never even try because they believe the myth that they don’t have enough money and were never taught how to invest in property with little money. There are thousands of sources for investment property advice out there but a simple, repeatable strategy will beat out 99% of those sources.

Investing to Fund Retirement

Everyday Aussie’s are turning to property investing as a source of post retirement income, with a steady strategy and game plan proving successful for thousands of medium income investors. The myth is that only the “rich” can live off of their investment properties, but the reality is anyone who makes the little sacrifices 20 years before retirement can set themselves up.

When it comes to building an investment strategy for retirement, there are two main strategies.

1. Living off of the rental income

The goal of this strategy is to build a portfolio that takes care of all related expenses as well as enough extra cash to live off so the numbers you crunch during your retirement planning never run out. The benefit of this strategy is you can continue you to grow your wealth through capital growth whilst bringing in a post retirement income. It also allows you to pass on the physical assets of the property to your children. The biggest factor stopping everybody from making this a reality is you do need to be willing to take on large amounts of debt and battle with market fluctuations which is why getting the right investment property advice before starting to build your portfolio is essential.

2. Selling the property to profit from capital growth

Strategy number two is all about sourcing high growth properties, waiting for the value to increase as much as possible then selling them to live off the profit. The positives of this strategy are you are more safe guarded against market fluctuations in your retirement years however the limitation is you will be left with a finite amount of money and will need to take more care in the specifics of your retirement planning.

How much annual income will protect you?

Whilst both strategies have their pros and cons, because we are looking at safeguarding you with a stress free retirement we will look at option 1, creating a portfolio that lets you live off your rental income as this strategy can ensure your retirement planning now gives you the freedom you desire then. This strategy whilst requires supporting a large debt and involves a moderate level of risk, allows you to consistently bring in an ongoing income throughout your retirement as well as growing solid assets that can be passed on to your children.

Retirement Planning Strategy 101: How Much Do You Need to Retire?

Before you can set a tangible goal for how many properties you need in your portfolio you need to determine how much you can comfortably live off each year. Unfortunately we still haven’t built the magic calculator that helps us to work out that number, a great way to start is to look at how much you’re spending right now on your current income. Would that amount be enough for you to retire on? Covering not only your everyday expenses but also the extra expenses involved in retirement planning like eating out more, regular holidays and general lifestyle experiences that come with retirement.
The Association of Superannuation Funds of Australia (ASFA) recently released a rough child through their retirement standard which provided in estimate of the annual living costs of retired Australians which might give you a rough idea of a potential Target.

The ASFA estimates when retirement planning for a couple looking to live a comfortable retirement, you would require $60,000 for annual living costs which rounds out to roughly $1,200 per week. When retirement planning for a single person around $44,000 per year is required or a little over $800 per week. A common goal for investors is to aim for an income of $100,000 per year, but the ASFA estimates give you a good idea of where you can start to live comfortably without the need to be aggressively frugal.

Before you get too caught up in your property strategy you can also check on your current Super trajectory with the useful Superannuation Calculator on the Government’s Money Smart website to evaluate where you stand already.

Creating your Retirement Planning Strategy

Creating a rock-solid retirement plan, is as simple as 3 easy steps:

  1. Know your Timeframe
    • Once you’ve worked out a rough target that you want to earn per annum, you now need to work out how far away you are from your ideal retirement age. Obviously if you plan to retire in 5 years you’re going to have to pull things together a little bit quicker than someone who has 25 years. Working out how long you have until you plan to retire allows you to put a tangible time frame on each new purchase as it usually takes some time to save the funds for each property.
    • Any serious investor understands that you need to take into account the effect of inflation overtime as today’s $50,000 will most likely be quite different in 20 years, so make sure this is calculated in to you final numbers whilst retirement planning.
  2. Understand the Total Costs
    • This can be a frustrating lesson not to learn at the beginning of your investment journey. When it comes to investing, there are many associated costs including rates, property management fees, maintenance on the home, insurance and a number of other one off costs that will pop up from time to time. If you’re planning to live off of your rental income then it’s essential that you manage these costs as a consistent factor throughout your retirement. As the number of properties increases, so will your running costs, so it’s imperative to stay on top of things from the start.
    • This can be a frustrating lesson not to learn at the beginning of your investment journey. When it comes to investing, there are many associated costs including rates, property management fees, maintenance on the home, insurance and a number of other one off costs that will pop up from time to time. If you’re planning to live off of your rental income then it’s essential that you manage these costs as a consistent factor throughout your retirement. As the number of properties increases, so will your running costs, so it’s imperative to stay on top of things from the start.
    • You need to consistently take into account the taxes on your rental income and your loan repayments on the properties and be sure to factor in all of these associated costs when working out your net rental yield or have someone you can work with who can take care of these numbers.
  3. Setting your net annual goal
    • Ok so let’s say you set your initial goal for an annual income of $50,000, now whilst you could easily calculate two rental properties worth $500,000 each on a net rental yield of 5% after taking into account loan cost, management fees and expenses you could leave it right there. Unfortunately it might not be possible for many of us when first starting out which is why it is essential to take the time to workout how to invest in property with little money
    • A realistic strategy for someone who has a more modest starting point is to start with an entry level property, for the purpose of this strategy we will say $350,000 each. After acquiring your initial property, spending a few years paying down the loan and building equity in the property and possibly even making some capital growth you should now have enough equity to purchase your next property. As long as you ensure a 5% net yield from your properties, maintain your strategy to build up to owning four properties over say 15 years you should be generating a total rental income of $70000 per year assuming that you have 5% net yield. Based on the marginal tax rates from 2016 to 17 you’ll be paying around $14,000 on $70,000 income. A simple equity piggyback strategy over a certain amount of time will see you be able to build up to bring yourself to a comfortable $50000 per annum.
    • It is important to diversify your property in different markets to prepare yourself for market fluctuations, however with an intelligent strategy constantly learning and surrounding yourself with the right people in the industry this strategy is more than feasible for anyone willing to put in the time, effort and financial care.
    • The graph below shows the numbers necessary to obtain a $50,000 annual income and also a $100,000 annual income, but as with anything, education is the key here don’t expect to be an investment pro after reading one article, whilst you’re here why not read two with some more sound Investment Advice.
Properties Owned45
Property Value$350,000$580,000
Net Yield5%5%
Pre-tax rental income$70,000$145,000
Income tax payable$14,297$41,282
Annual Residual Income$55,703$103,718