Passionate about property investment as a vehicle to build wealth, Lloyd enjoys sharing his deep industry knowledge to help people become financially independent.
For most of us, retirement seems a lifetime away (and with moves to increase the retirement age to 70, it’s even further away for those born after 1965). But, one day, you will retire. As we go about our lives, it’s easy to get caught up in everyday expenses without thinking about future finances.
Retirement is supposed to be about living the life you want, but that means having enough money to do the things you love. According to the Australian Bureau of Statistics, surprisingly only 10.7 per cent of Australians who retired from the labour force will have a total gross weekly household income of $1,500 or more in retirement.1
The 2014 Budget first outlined Federal Government plans to lift the retirement age to 70 by the year 2035. It also prompted discussion that the superannuation preservation age would increase to match the retirement age. Since then, the retirement age currently sits at 66. It will creep up to 66 years 6 months in mid-2021, and 67 years by mid-2023. By mid-2024 the preservation age is set to be 60 years, up from 57 at this present time.
The impact of this means you will have more time for your investments to grow and less time to spend the results. But consider, too, you may need to stop work earlier than you intend.
So while the rules around retirement may continue to change, one certainty is that tomorrow’s retirees will need a plan that includes super, supplemented by passive income from other investments.
For the purpose of this article all examples will be based on a retirement age of 66 and rounded to the nearest $1,000.
Household net worth
where main source is investment income
where main source is superannuation income
where main source is pensions and allowances.8
Out of sync
Improvements in aged care and diet, along with medical advances mean the majority of people today will live longer than generations that went before them. As a result, our retirement expectations are out of sync with our retirement savings, and most of us aren’t saving enough to pursue our retirement dreams.
Our idea of what is ‘comfortable’ is likely to be slightly more than the Association of Superannuation Fund Australia’s definition. They nominate $43,601 a year for singles, or $61,522 for couples aged around 65.2
The consensus is that around two-thirds (67 per cent) of your pre-retirement household income should be your retirement income target.3 Therefore, if you earn a household income of around $120,000 per annum pre-retirement, an annual retirement income goal of $80,000 p.a. would be a more appropriate target to maintain your standard of living.
How much do you need?
If you want to earn $80,000 p.a. in retirement, you will need to be mortgage-free and have $2,000,000 (in today’s dollars) in investments (based on a 4 per cent return.) With inflation at 2 per cent, in 17 years’ time (when the retirement age is 67) this equates to an annual income of $112,000 from a $2,800,000 portfolio.
When Tony and Judy retire, they plan to travel the world and visit relatives overseas.
Meet Tony and Judy Jones
Tony and Judy represent an average professional Australian couple whose goal is to retire in 17 years at age 67. They currently have an annual income of $160,000 and also have $155,000 in superannuation savings.
Tony and Judy want to travel around the world and visit relatives overseas. They also want to be able to pay for their daughter’s wedding and access the right medical care and retirement accommodation when needed.
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In 17 years Tony and Judy’s superannuation savings will grow to $664,000 from their regular contributions and returns from funds invested. This takes into account the increasing superannuation rate over the coming years.
Despite this growth they still have a retirement shortfall of $2,136,000 if they want to achieve those financial and lifestyle goals. That means they’ll need to save $126,000 every year for the next 17 years... it’s a frightening figure. But there is a smarter way for Tony and Judy to close the gap.
Plan earlier and smarter
Most Australians like Tony and Judy struggle to reach what they need to achieve a comfortable retirement because they don’t have a plan in place. Typically, like Tony and Judy, their savings are accumulation-based. With this approach it’s unlikely they’ll reach their goals by retirement age. The alternative way is to earn money from assets. There are many investment products available with the most common being direct shares, high interest savings accounts, extra super contributions, term deposits, self-managed super funds and managed investments.4
Property growth is another investment that can help you build wealth. With such a sustained growth, you’d think more Australians would invest in property. However, according to the Australian Taxation Office only 1.86 million Australians are recorded as having an interest in a rental property. Of those, the majority (71 per cent) have an interest in only one rental property.5
If we go back to Tony and Judy’s case, for example, we have established they need to save $126,000 a year for each of the next 17 years. Structuring the purchase of multiple rental properties into their investment plan would be one way for them to reach this goal or exceed it (refer table 3.)
The plan for Tony and Judy
in 17 years
Purchase 1x property
Purchase 2x properties
Borrowings (interest only loan)
Purchase 4x properties
Borrowings (interest only loan)
*all figures rounded to nearest $1,000.
If property is to be included in your investment portfolio, you may consider enlisting the expertise of a professional who specialises in property investment.
Where to from here?
If you decide to invest in property, take some time to consider your overall retirement goals and timeframes and be sure to work with a reputable company that can assist you in building an investment portfolio.
The right consultant will consider your current situation and goals, calculate your borrowing capacity, then provide a plan with a clear strategy to achieve your desired outcome, making sure your decisions are informed, and not based on emotion.
The information contained in this article is general in nature and has been provided in good faith, without taking into account your personal circumstances. While all reasonable care has been taken to ensure that the information is accurate and opinions fair and reasonable, no warranties in this regard are provided. We recommend that you obtain independent financial and tax advice before making any decisions.
Retirement and Retirement Intentions (Table 3), Australia, July 2016 to June 2017, (6238.0), ABS.
This information is provided by DPN Pty Ltd ABN: 94 630 700 186 Australian Credit Licence 514759. DPN Finance Pty Ltd is an authorised credit representative 504129 and related entity of DPN. Credit for Dream Big 100% Offset and Work Smart 100% Offset is provided by Adelaide Bank a division of Bendigo and Adelaide Bank Ltd, ABN 11 068 049 178 and Australian Credit Licence 237879.