When we’re young, the bulk of our income goes towards paying our bills, mortgage, and lifestyle. As we get closer to retirement, we want to pay for our lifestyles through the financial assets we’ve accrued throughout our lives. Here’s how to accrue some extra funding from your portfolio.
Your retirement income may come from interest payments on term deposits, or government bonds, a pension payment, or dividends on shares, or rental income from your property portfolio, for example.
According to the Switzerland-based Bank of International Settlements, Australian house prices have grown by a massive 6,556 per cent since the early 1960’s. That works out to be an average annual increase on property assets of 8.1 per cent.
Now, for those of you who are old enough, imagine what your financial life would look like if you had you been able to secure an extra one or two investment properties back in 1973. Or in 1983, or even 2003.
Clearly, the key to lasting, sustainable wealth is to start building your asset base as early as possible.
So, what should we be focusing on at different ages?
16 – 35 years old
Up to this point of your lives, you have probably spent most of your time studying and/or are entering into the initial phases of your working lives. Let’s assume that you start work at 25 and plan to retire at 65 years of age (even if most of us in this age bracket are not thinking that far ahead), that means you will be working for 40 years. The average full-time adult earnings in November 2017 was $1,628.10, or just under $85,000 per annum.
So, assuming you only earn an average wage over the course of your working life, it is likely that you will earn at least $3.4 million and probably in excess of $5 million or $6 million by the time we factor in wages growth and inflation.
So, the real question is, what are you going to do with all that money? Well, most younger Australians will spend the vast bulk of their incomes on costs of living (e.g. rent, food, bills), establishing themselves (buying cars, clothes, tools, handbags, jewelry, computers, whitegoods, etc.) and often gaining invaluable life experiences (travel, relationships, etc.).
However, some people start investing early. Luke, for example bought his first property at just 20 years of age, because he chose to defer certain things in life (like travel) in order to get onto the property ladder as early as possible.
Rentvesting, may be a good strategy to consider at this stage of life. That is, rather than buying your first home, you buy your first investment property instead and let the tenant and the tax man help you pay for it!
36 - 45 years old
The typical Australian has probably been focused to this point of their lives on raising kids and paying the mortgage on their principal place of residence, but now is probably the time for those that have built up some equity in their home, or have savings for investment purposes, to look at broadening their asset base.
As a general rule, the earlier you can start to build a portfolio, the better. For example, a good quality investment property, after accounting for the rent from the tenant, and any tax deductions, may only require $20, $50 or $100 a week to control.
The main goal here is to accumulate as many high-quality growth assets as you safely can without putting your cash flow under any strain.
46 - 55 years old
Peak earnings occur for most people between ages 40 and 55. Now, assuming that the kids have flown the nest, or are at least not leeching off you to the same extent as when they were younger, you may now have more disposable income to start accelerating your asset purchases.
You might also want to consider salary sacrificing, or making voluntary contributions to further boost your superannuation.
56 - 65 years old
For those that have seen equity on their home or investment properties, now is a good time to look at consolidating your asset position and maximizing your cash flows. You might consider downsizing the home, or selling off an asset or two, to re-balance your debt levels or at least have plans in place as to how you are going to transition towards your retirement years.
Unless you were late to the party, or have missed the boat altogether, and are still in asset accumulation mode, now is when you may want to start to re-align your assets to be more focused on income than growth.
Assuming that you have followed a carefully constructed wealth plan, started your asset accumulation early enough, and been well invested over the long term, now is really the time to look at enjoying your golden years, leaving a legacy, or helping out others with either your time or any extra money that is surplus to your lifestyle requirements.
So, here are three things we all can do to ensure we have a great retirement:
1. Have a plan
We travel all around Australia educating thousands of Australians every year on how to use property to better help them achieve their financial goals and are consistently shocked with how few people actually have considered a property investment plan. If you need assistance in creating your property investment plan, then reach out as we are here to help.
2. Start early
According to Einstein, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it!”
3. It pays to get educated
Unfortunately, things such as the collapse of Storm Financial, Westpoint, Opes Prime, Trio/Astarra, Sonray Capital and Great Southern Plantations, and decades of financial and banking scandals have shown us that it is can be hard to know who and what to trust. That is why we always recommend that you increase your knowledge base and get well-educated in any markets you may want to be investing into.
About the Blogger
Luke Harris and Matthew Bateman are co-founders of The Property Mentors.