It can be difficult to know how much property and equity you need to acquire in order to live a comfortable and prosperous retirement. Richard Sheppard reports
There are many other forms of investment that will contribute to your retirement income such as superannuation and pensions, however, many people ask just how much income property can add to their total retirement pool?
In more simple terms, the main form of income from property is rental income. However, when planning for retirement, it is also important to understand how equity and capital growth can be used to support you.
Living off rent alone
The long term average gross rental income in Australian capital cities for most property is about four and a half per cent of its value (for example approximately $450 per week for a $500,000 property) but the net return after allowing for ongoing costs such as agent management fees, maintenance etc is closer to four per cent, or $400 per week for a $500,000 property. This doesn’t allow for the interest on a loan, so this is the net rent for a debt free or unencumbered property.
At four per cent net, you should receive close to $40,000 for every $1,000,000 of unencumbered property, so you would need close to $2,000,000 of property to have an $80,000 income if you want to live off the rent alone.
Don’t forget inflation!
The figures shown above are all estimated in today’s dollars and don’t allow for inflation. $40,000 in today’s dollars, indexed for inflation at the average rate of two and a half per cent over 30 years is actually $83,900. Similarly $1,000,0000 in today’s dollars, indexed for inflation of two and a half per cent over 30 years is actually $2,097,000. This means that if you estimated retirement income is $40,000 in today’s dollars, you will actually need $83,900 in 30 years time to live the same lifestyle, which of course means a little more than $2,000,000 in debt free property.
Understandably this seems like a substantial amount of property to acquire and pay off, so in next month’s column we will take a look at some strategies to build a portfolio of this size and talk more about how living off equity and capital growth can significantly reduce the amount of property needed to retire.
Richard Sheppard is the Managing Director of inSynergy Property and Finance Solutions. inSynergy provides professional property investment advice, property market research, specialised mortgage broking services and is an accredited investment property buyers’ agent. Visit www.insynergy.net.au or phone 1300 308 808.