It is never too late (or too early!) to start investing for retirement. So, how much you will need to retire, and can you use property investment to plan for your retirement?

Property is a great option to consider when planning for retirement. However, many people do not know how to factor property into their retirement planning – where to start, and how to navigate the process once they get closer to retirement. It’s clear to see why, as it’s a complex process that can seem overwhelming, with many factors to consider such as planning for costs, tax, superannuation, and other factors that affect retirement.

Most people generally don’t start thinking about retirement until they are 45 or older, but the reality is that a lot could have been done before this stage. This is definitely not to say that it’s too late if you’re over 45 and have just started thinking about retirement – it’s never too late! We just want to get the point across that it’s also never too early to start planning. The sooner you get started, the easier it will be. Trust us – retirement is the one thing you don’t want to procrastinate over!

 

Know your end goal

Some people want to buy an old property, remodel it, and flip it to earn money. Some want to buy property to sell and take advantage of capital growth, and others look for rental income producing properties. Our preferred tactic is to build a portfolio of income producing properties (or a combination of all of the above!). However, this isn’t an easy or simple process (becoming financially independent never is!), and requires a long term view and a willingness to become familiar with crunching serious numbers.

If you don’t know what your end goal for retirement is, you should ask yourself two basic questions to get started – how soon do you plan to retire, and how much will you need to retire?

To be frank, no one can answer those questions for you. Knowing what you need to retire is something that is entirely dependent on personal factors, such a the lifestyle you want to live. It’s important to find a number that is comfortable for you. The Association of Superannuation Funds of Australia (ASFA) provide an estimate of the annual living costs of retired Australians, which for an average Australia works out to be around $44,000 for a single and $60,000 for a couple, to live a ‘comfortable lifestyle’ (they also have a calculator, check it out!)

 

Map out the journey

Once you know your end goal of what your annual income will be when you retire, you need to work out the best path that will get you there.

Some follow the rule of 25. This is a general rule in which you multiply your desired annual income by 25. For example, if you want to withdraw $60,000 per year from your retirement portfolio, you will need $1.5m worth of property investment, and generate at least a 4% return rate. Therefore, if you retire with a property portfolio worth $1.5m, this would generate the $60,000 per year that you need to live comfortably on. Keep in mind that this return rate is not a given, and may in fact be lower or higher year to year. Another thing to keep in mind is inflation! Your idea of a comfortable figure now, may be very different if you are looking to retire in 20 years time.

Now, most people won’t get one single investment property worth $1.5m, so it is likely you will need to start with one property, and build upon it. Serial renovator, author, and tv presenter Cherie Barber recommends having multiple properties that all serve a purpose in your portfolio. Say you needed $2m worth of properties to deliver a passive income for your retirement. Cherie says “That’s four properties valued at $500,000 each and all fully paid off by retirement. Property one is the home you’re living in. Property two and three generate the rental income you live on, and property four pays all the costs on your property portfolio.”

Figuring out exactly how and when you can acquire such properties for your portfolio is the next part of your planning. Mapping out financials and projecting your cash flow (yay! Everybody’s favourite part!) is extremely important, and will help you calculate how much money you will need over time. The monthly rent you earn on an investment property will be one of the main sources of your income. So, you will need to know how much money is coming in from the property, after expenses, and how you can service the loans.

 

Know how you will be affected at retirement

It is also important to know how you will be affected when it comes the time to retire, for example how you will be taxed on your retirement portfolio. The last thing you want is to get to the point of retiring, and have to pay unnecessary taxes instead of getting to actually enjoy your earnings. Adequate planning can help ensure that this will be the case.

It’s also important not to put all of your eggs in one basket, which is another reason why investing in multiple properties, as opposed to just one big one, is also a good idea. Your property investment portfolio, like any investment portfolio, should ideally be diverse enough that one bad investment won’t negatively affect the rest. We recommend discussing your plans with your financial advisor (or contacting us if you need help finding a good one!) to make sure that your plans are suitable for your needs, and if they will indeed be able to service you in retirement.

 

Get started

Once you’re confident that you have adequately planned what your investment journey should look like, the only step left is to actually get started, if you haven’t already done so!

Start with your principal place of residence, and leverage this to get your first investment property. Make sure that you acquire properties that will help you achieve your investment goals – read our tips for buying properties that suit your investment needs, not your personal preferences.

Lastly? Be patient. This is a long term process. Which, is why we think you should get started now. Trust us, if there’s one thing in life you should never procrastinate, it’s planning your retirement!


If you’d like to get some individual advice about how to plan for retirement with property investment, we’d love to help! Please get in touch with us at info@ippaustralia.com.au, or fill out this contact form and we will get back to you.