Most people dream of using their superannuation to live comfortably in retirement.
However, it’s not just about having a decent chunk of cash to live off; it’s about how you strategically invest in assets to create enough income for a stress-free retirement. Many people assume that accumulating a significant sum, such as $1 million, is enough to retire, but the reality is far more complex.
If you were to retire today with $1 million, and you didn’t want to spend down your capital or take on excessive risk, what kind of income could you realistically expect? In today’s market, you might achieve a return of about 4-5% on that amount, but this rate can vary depending on how you invest. Your absolute risk-free option, for now, could be a term deposit with a bank offering returns in the high fours.
But let’s not forget, these rates can drop over time, and inflation will steadily erode the value of that income. While it’s appealing to park your funds in a term deposit for peace of mind, there’s no capital growth to help your wealth keep pace with inflation.
To maximise income and grow your capital, you’ll likely need a mix of assets. A balance of cash, term deposits, and a well-managed share portfolio can generate that same 4-5% return. Investing in Australian shares has the added benefit of franking credits. If your income is low, you can claim back those franking credits in cash, or use them to offset tax bills, adding another layer of income for your retirement fund.
Depending on your asset mix, I would also suggest that Australians really need to have a property (or multiple) involved in their retirement plan. Many Australians rely heavily on rental income to support their lifestyle once they stop working.
For example, some clients live off the rental income from one or two investment properties, which can generate $30,000 to $40,000 annually. This income, combined with the roughly $80,000 a year they may draw from their superannuation, results in a comfortable yearly income of $120,000.
The added benefit is that the property will also continue to grow in value over time, and if you can live off the rental income alone, you aren’t drawing anything down from it. To make informed property decisions, consider working with a buyers agency. Their expertise can help you find suitable investments that align with your retirement goals.
The other big advantage that you have with property, is that you are able to use leverage to get you that property in the first place. Engaging a buyers advocate can also be beneficial, providing additional insights into the market.
If you wanted to buy a property worth $1 million, you theoretically only need to put down 20% or even less than that if you are prepared to pay Lenders Mortgage Insurance. What that means is that you will have the benefit of controlling an expensive asset that is growing in value, with very little money down.
In contrast, if you put $100,000 into shares, your portfolio will effectively be $100,000. In property, the power that leverage gives you means that you will get a lot more growth over time in dollar terms.
Your $100,000 share portfolio might grow by $9-10,000 per year, with dividends and capital growth. But your investment property will potentially grow by $70,000 per year. That’s the main reason you want to add property to your retirement mix.
Achieving that $120,000 per year in retirement income is very doable. Just be sure to understand how powerful property can be and why you need to add it to the mix. Many investors utilize buyers advocacy services to ensure they are making the best choices for their portfolios. Having the right buyers agents on your side can significantly enhance your investment strategy.
