Imagine you could retire on double your current income with your home paid off, a great investment property portfolio and all the time in the world to enjoy it! Sound like a pipe dream?
Believe it or not, with the right advice and planning this is completely achievable. Even with conservative capital growth forecasts it’s possible to be in a position to retire on roughly double your current income if you invest in property well, even allowing for inflation, so double your income at retirement is effectively double your current income in today’s dollars.
Planning is key to success
Of course, no-one knows what the future holds, but if you take past learnings into account and add some sensible and conservative future assumptions, you can plan for and model your future goals. Getting your strategy clear now means you can make any necessary tweaks if you’re not currently heading in the right direction.
The added benefit of this planning is that it can shine a bright light on your future and motivate you to do what is needed to get there. It can also help you to enjoy the journey, knowing you are on the right track and heading towards a better, safer retirement. It may even demonstrate that you don’t need to be quite so conservative with your current spending and can therefore enjoy a better quality of life more immediately!
How one Northern Beaches couple are planning for retirement
Peter and Anne, aged 40 are married with two children, Kate aged 5 and Max aged 8. They purchased their first home ten years ago for $800,000 and have paid their home-loan down to $500,000 and built up addition savings of $50,000.
Anne works full-time earning $150,000 + super per annum and Peter works part-time earning $50,000 + super per annum. Their home is now worth $1.5M, their combined superannuation balance is $250,000 and they have no other debts. Their living expenses are average and they can afford to save or contribute around $400 per week towards investing.
Their immediate plan
Peter and Anne engaged us to assist them with their property investment strategy, having first completed our personalised property investment education and strategy workshop to learn the fundamentals of property investment and using mortgage finance as a tool to facilitate the wealth creation plan. Here’s a high level overview of their strategy:
- Borrow to invest in a $500,000 positive cash flow investment property using the equity in their home as security.
- Borrow an additional $25,000 as a cash reserve buffer to help manage cash flow and risk.
- Our detailed research helped them pinpoint where to buy their investment property based on strong capital growth forecasts (hint, this wasn’t Sydney!).
Longer term plan
- Invest in a new property every three years provided everything is progressing to plan and their personal and rental income is increasing by around 5 per cent (or 2.5 per cent above inflation).
- Add to their savings by around $100 per week every year, which in addition to the positive cash flow property will help pay off their home loan by about $30,000 per annum. Over time, this amount will keep compounding even lower each year and the equity in the investment properties will grow substantially more.
- Using this strategy they will own seven properties by age 61 with about 50 per cent equity and their home paid off. They could then pay off the investment property debt by around $2,000 per week or $100,000 per annum, while also making maximum low tax super contributions of $25,000 each per annum.
- After another four years, by age 65, they would have $3M in superannuation, $2M in savings and loan redraw funds from making extra payments and $15M of investment property with about 50 per cent equity, but positive cash flow by $2,000 per week.
Of course, these numbers seem big because it’s effectively 25 years in the future after averaging 2.5 per cent inflation, which actually makes the numbers look twice as big as they are in today’s dollars, so if we halve these latest numbers they seem more realistic, albeit still great!
If you reach retirement with an investment portfolio with 50 per cent debt, the old fashioned approach was to sell slightly more than half the properties to pay off all the debt, allowing for selling costs, then live off the rent with no loan repayments. However, the better option when you have superannuation and savings available, is to live off that for a number of years until the balance gets low, then sell off one property roughly every five years, enabling you to retain the properties for longer. This allows them to grow more, which provides more equity and cash to live off when you eventually do sell them.
With this strategy, in today’s dollars allowing for inflation, Peter and Anne should be able to live off double their current income even if they live longer than 110 years old while keeping their debt free home or an equivalent value property – now wouldn’t that be great!
Of course it’s not going to happen exactly this way, but if the averages are close to the assumptions noted, this scenario provides a good indication of what they can achieve. Even if it’s a little less, that’s still a fantastic outcome!