Investment for retirement

Although the Australian Superannuation system is one of the largest in the world, it does not provide a perfect safeguard to ensure that people facing retirement have adequate savings to last through retirement without relying on the pension. The average super balance at the time of retirement (assumed to be age 60 to 64) in 2015-16 was $270,710 for men, and for women the figure was significantly lower at $157,050(i). Approximately 2 in every 3 people rely on government assistance post retirement(ii).

One of the major problems is that Australians assume that their superannuation will do the job come retirement. We have a “she’ll be right” attitude when it comes to our savings, highlighted by a recent ABS article that shows that more than 60% of individuals aged 55 to 59 expect to self-fund their retirement, but less than 20% are meeting those expectations(iii). If individuals so close to retirement are getting it so wrong, what does that say about the planning of those who are younger?

One option that Australians have open to them is investing outside of their super for wealth creation, but Australians typically prefer to let their superannuation do the heavy lifting. Less than 10% of Australians buy an investment property(iv) as well as their own home and less than 35% of Australians invest directly in the share market, and that figure has been dropping(v).

However, both property and share investment outside of super can be a way to boost retirement savings. As we are professionals in the Melbourne property market, we are going to present some scenarios about property investment – not to say that other investment options are less attractive, just to give you some information.

For those who have invested in the Melbourne property market over the last 15 years, generally speaking, the returns have been consistently good, even despite some down years (including 2018). ABS data shows that property prices on average have gone up by 5 to 6% per year since 2003. Of course, past returns are not indicative of future returns, but the main economic drivers of this growth have been an increase in population in Melbourne, as one of the world’s most liveable cities, as well as a drop in property supply, all in a low interest rate environment. Supply has not kept up with demand and, with forecasts having Melbourne’s population growing to 8 million over the next 35 years(vi), it’s difficult to see demand reducing in the longer term.

Case study

Melissa and Chris are in their 40s and have two kids at school. Melissa works part-time as an IT consultant and Chris is a plumber. Their medium-term financial goal is to minimise tax so they can pay more off their mortgage.  They’re also starting to think about the lifestyle they want in retirement which would, ideally, include travel and a few little luxuries. The bottom line is that they are prepared to work hard now because they don’t want themselves or their kids to struggle in the future …

They decide to invest in a Melbourne property with the expectation that it will boost their retirement savings. They initially purchase a property for $500,000, borrowing $400,000. Over the next 20 years, their property averages 4% growth which is below the historical returns outlined above. Despite this, their property increases to $1.052 million by the time they sell at retirement.

They made approximately $553,000 over the 20 years. The rent they receive matches the costs associated with running the property over they time they had it. After paying some Capital Gains Tax upon sale, they each pocket over $200,000 to help their retirement savings. To put this in perspective, the increase in Melissa’s retirement savings is more than the average woman retires on. Similarly, Chris has had a significant increase in his retirement savings.

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You should assess whether the information on this website is appropriate to your particular investment objectives, financial situation and investment needs. You should do this before making an investment decision on the basis of the information on this website. You can either make this assessment yourself or seek the assistance of any adviser.