The reason most of us are out there working and building a property portfolio is in the hopes that one day, we will have enough assets to our name that we can use to live off the income they produce.
That’s the idea behind building passive income streams, but I find that most people don’t really understand that they can actually earn a whole lot less than they do now and still come out well ahead.
When I speak to people about how much passive income they want to earn, they all say they want a lot more than they are earning right now. So if they are currently making $150,000 in their jobs, they will then tell me they want to make $500,000 per year.
While that’s nice, in the short term, that probably means they actually need to work harder or change what they are doing to give them the opportunity to make that extra money. Buying an asset might see you build a lot of equity quickly, but it takes time to build passive income.
The other key mistake that most people make around passive income in retirement, is thinking they need to fully replace their income.
The reason for that is that most people miss the fact that you are going to be earning tax-free income in retirement. When you hit retirement age, the money from your super is tax-free and this is a massive advantage to retirees.
For example, if you are earning $300,000 currently, the majority of your income is actually gobbled up by the tax man. You will likely be paying roughly $120,0000 in tax and that leaves you with around $180,000.
If you were theoretically able to retire tomorrow with money from your super, you would only need to be bringing in $180,000 from your passive income streams such as your investment properties (if they are part of your super fund).
This is a pretty big difference and it actually means you need to have a far lower asset base than most people might think.
The other big difference when you hit retirement age compared to where you might be right now is that the expenses you have with your properties should theoretically be a lot lower. And the main reason is that the properties should be paid off.
That means you’re not paying the interest or making the mortgage repayments, which for most people is a significant draw on the income they get from their investment properties.
If you do want more money in retirement, it just means you need to invest more aggressively today and build that larger asset base. That’s also very possible.
There really is no magic number for how much we need in retirement. Everyone is different and will have different circumstances.
The great thing is that if you are young or in your 30s, 40s or even 50s, there is still time to accumulate those assets.
But if you haven’t started yet, now is the time to get moving. The earlier you start, the better those passive income streams will be in retirement.
If you are interested in getting ahead in the property market, feel free to reach out to a Henderson buyer’s agent today for more information.