Compulsory superannuation was introduced to complement the retirement savings of working Australians back in 1992. Twenty-three years on, it is clear that additional investing alongside superannuation savings is necessary to achieve financial security in retirement.
Today, the superannuation guarantee(SG) is 9.5% of our wages, but experts agree that this will not be enough to fund a comfortable retirement.
So, how much is needed to retire comfortably using superannuation? In its 2014 paper on the adequacy of superannuation, Deloitte Australia calculates that the employer’s superannuation guarantee would need to increase to 12% AND each person would need to contribute an extra 5.5% to 7.5% of salary to superannuation each year of their working lifetime to selffinance a “comfortable” retirement (about $43,000 per annum). How likely is this to happen? And is $43,000 your idea of “comfortable”? It is certainly not mine!
PROPERTY CAN MEET THE SHORTFALL
A sound property-investment strategy will complement your superannuation and ensure that you can live a life in retirement that you will enjoy. If you retire from the workforce in your sixties and live until your mid-eighties, then you need a fair amount of capital to fund this 25-year period of your life (the average life expectancy for Australian women is currently 84 and for men it is 80 so this is not unusual).
If you want to retire on an annual income of $50,000, you will need to invest in quality assets worth $1,000,000 that give you a yield of 5%. If you want to retire on an annual income of $100,000, you will need $2 million in assets generating 5% per annum. Over 25 years, you are likely to cut into this capital for unexpected expenses and also inflation will erode its value. So accumulating investment assets to reach your target income is a must!
A property portfolio can be part of a set and forget strategy that, if well-managed, will increase in value and generate good cash flows to supplement your retirement income from your superannuation.
As with superannuation, the earlier you start investing in property the better, as the power of compounding enhances your returns over time. In addition, leverage will substantially accelerate wealth creation for well-located properties, as a small deposit will give the investor access to capital growth on the whole value of the asset. Leverage is partially why property investors can start to invest later in life and still achieve financial security (although it’s not advisable to put off getting started). Superannuation does not offer this ability to ‘catch-up’ as annual concessional contributions are limited to $30,000 for most people ($35,000 for those over 49 years old). This, together with the lack of leverage, prevents you from tipping in large sums into super if you find your savings are not on track.
PROPERTY AND SUPER – A MATCH MADE IN HEAVEN?
Some investors choose to marry the two – direct property investing and superannuation – by setting up a self managed superannuation fund (SMSF). Here is an example of what it would look like:
Let’s assume that you are able to borrow 80% of the purchase price of a house/unit valued at $400,000 through your super fund. You will need about $100K from your available cash in SMSF as a deposit and to pay for stamp duty etc.. You pay interest at 6% which means your cash flow is negative by about $4,000 per annum. To make it cash flow positive you need to inject more cash. I would suggest that a minimum superfund balance to invest in property is about $200,000. This would allow for the $100,000 deposit, etc…, a buffer for the negative cash flow and also some room to invest elsewhere for diversification sake.
You might be far better off investing this $100,000 in income stocks and receiving dividends of 8%+ (with franking credits). This would be a less risky strategy for an SMSF with a balance of under $200,000.
PROPERTY ADDS DIVERSIFICATION
Some investors, and this includes me, opt to use superannuation to invest in the share market or in cash and invest in property outside of super. I like this strategy as it allows the investor to have exposure to shares & cash as well as property. At the same time ongoing taxation of property outside super is a lot more favourable (negative gearing is limited to 15% in a SMSF). It is true that outside of super capital gains applies on sale of property, and this needs to be factored in your plan but don’t forget that if structured properly you may not have to sell your portfolio even in retirement.
In conclusion, Australia’s superannuation system is world-class and one that we should be very proud of. However, it will rarely be adequate to provide you with a comfortable lifestyle throughout a long retirement. Property investing can be an attractive option to make sure that you achieve your long-term financial and lifestyle goals. My advice, though, would be to keep direct property investing and your superannuation separate.
Philippe Brach is CEO of Multifocus Properties and Finance
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property
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