Why Property Investment is a “Must Make” Decision for Successful Retirement

By Justin Wang

As a property investment consultant, I encounter people who say that they are not interested in property investment. But the truth of the matter is not so much that they are not interested, but rather that they’ve never considered it, explored if it’s possible, or they are fearful of the financial commitment. However, property investment is no longer a matter of interest; it is a “must make” decision if you expect to retire comfortably on an income that will grow with inflation and the economy so that it withstands the tests of time.

The Truth About Retirement

Regardless of your type of occupation, whether you’re self-employed or an employee, or the amount you earn, you need to consider your retirement and how you are going to afford to live when you stop working. Many people think that it’s years away, so they don’t need to think about retirement now, but you and I both know that the days and months quickly turn into years, and then slip into decades before we know it. So even if you don’t have time to think, or don’t want to know about retirement, eventually it will present itself whether you like it or not.

To 95 percent of the population, the word “retirement” makes them feel good as they’ll have more “free time,” but in the same instance, they also worry. This is due to the fact that for many people, retirement means having to live on less money, which in many cases, is not enough for them to live comfortably. In fact, according to financial planning experts, if we have 100 people aged 25 years today, after 40 years of working, only five of these people will be able to fund their own retirement. Of the 95 people remaining, some would have passed away, while others will have to still keep working to survive, or they may merely rely on social welfare and charity donations to get by.

How Much Do You Need to Retire On?

To retire — “re” (back) and “tire” (draw) — literally means to withdraw, often to a place of safety and seclusion. In this respect, it can be said that to “retire” from working life means that you can relax, without any worries. But to do this, you need to know how you’re going to pay for your cost of living. A number of retirement surveys have been conducted across Australia, where Australian couples have been asked about the amount they feel will be needed for retirement. Most couples said that they would need between AUD$30,000 and $50,000 each year for a comfortable retirement. This is providing that they have no mortgage to pay.

So, you need to ask yourself this: “If I want to retire comfortably, where will this $30,000 to $50,000 come from?”

The Government will encourage all Australians to save more for retirement by introducing higher rates of compulsory superannuation.

If you said a Government Pension, then you need to think again. While Australia has a social welfare system, it is not comprehensive. Our baby boom mainly happened after World War II. Then in the ’60s, when these people, also known as “Baby Boomers,” were young and building up the country, the average life span was far less than it is today. In fact, back then, there were six taxpayers to one pensioner, and this allowed the government to easily take care of its seniors. But times have changed. Now the Baby Boomers are reaching their retirement age, their life expectancy has increased to over 80 years, and there are far more of them than there was in the ’60s.

Today, there are six taxpayers to three pensioners. So the Australian government has to look at ways that they can reduce the amount of money being paid to pensioners, as the nation can no longer offer the same level of support. This has led to a reform in pension legislation. At the beginning of 2015, the pension for a single person was AUD$22,365 and for a couple AUD$33,717; this included a pension supplement, as well as a Clean Energy supplement. However, over the next two years, only some Australians who meet the pension age requirement will be eligible for a pension, as means testing is about to be introduced. It is also predicted that the government will encourage all Australians to save more for retirement by introducing higher rates of compulsory superannuation and restructuring tax over the coming years. Based on these expected changes, the government has also stated that some Australians may have to work for longer, rather than retiring.

Is Superannuation the Solution to Retirement Funding?

According to many superannuation organisations, the majority of Australians believe that their superannuation funds are the solution to them being able to retire. But given that, on average, Australians only have around AUD$70,000 each preserved in their superannuation, it is highly unlikely that their superannuation alone will be enough to fund a comfortable retirement. For instance, let’s say a couple needs AUD$30,000 per year to retire comfortably, and they retire when they’re 65 years of age. The couple then lives until they’re 90 years of age. This means that the couple will need a minimum of AUD$30,000 x 25 years for a comfortable retirement, or a total of AUD$750,000.

Some financial-planning experts have even suggested that a person earning $40,000 a year for 30 years will only receive a retirement income of around $19,000 a year. This is due to tax, the cost of living, and other expenses eroding their cash flow, and reducing the amount they are able to save. Plus, we also tend to live life within our means. A financial planner and bestselling author, Brian Sher, said that we tend to live life according to how much we earn. For instance, when we first start our working life, our pay is much smaller, so we tend to buy a smaller, more affordable car and a smaller home. But as our income grows, along with our work experience, so too does the size of our car and our home. Thus, we tend to live life according to our means, rather than living life conservatively and then saving the rest for retirement.

But even if these people put every cent they save into their superannuation, and their superannuation fund gives them a return of 6 percent, the reality is that most super funds cannot consistently have a high return. They also have big losses. In fact, the Daily Telegraph reported recently that one of the biggest super funds in Australia, The State Super Fund, lost AUD$7 million daily over a 16-month period, and this for a retiree can be devastating financially.

So, while some people hope to solve their retirement funding problems by working hard and saving money, the truth of the matter is you won’t be able to save enough, not after you deduct tax, expenses, and fight the ever-rising costs of living. Plus, you also need to think about inflation, and how what you save today will not have the same value in the future.

Inflation and How This Erodes Our Retirement Wealth

If you are already rich due to business or other means, then you should really be beginning to think about how you can maintain your wealth, rather than allowing your wealth to be eroded over time. For example, let’s say a couple owned a business in 2000, and at the time, they had AUD$500,000 in a term deposit in a bank. During that financial year, the couple decides to sell their business and retire. The sale of their business pays off their home, and they live off the interest from their savings account, which gives them a healthy return. The couple believes that this money will last them until they pass away, which, back in 2000, it may have. But since then, the cost of living has risen considerably, and interest rates have fallen quite dramatically. The couple is now having to consider other options as they are now merely surviving on the interest gained from the $500,000 in savings.

How to Generate Long-term Wealth

To generate real wealth that is long-lasting, you need to think about the type of assets that can keep you wealthy. The best assets are savings, a business that generates a strong turnover and profit, as well as shares, and property. In order for an asset to be considered viable and able to generate real wealth, it should be able to hold its value and increase in value over time, and be able to generate a stable income.

Investing in Property Enables You to Build and Maintain Your Wealth

When you consider how Australian politics, the economy, and even our social status impact on our retirement options and how these can erode our wealth, it makes sense to look into property investment further. Property typically grows in value long-term, and it is able to adapt to changes in inflation. Plus, it is an asset that you can touch and feel, meaning that unless it is affected by an act of nature, such as flood or fire, it will still be there tomorrow. Unfortunately, the same cannot be said of stocks, shares, or even superannuation.

At present, one of the best markets for property investment can be found in Sydney. It is a market that has withstood the tests of time, and is continually growing and expanding to accommodate an increasing population. Supply and demand make Sydney property investment a “must-make” decision for successful retirement.