Advice on buying investment properties and building wealth is relatively easy to come by – but how do you work out what to do as retirement nears?
Your Investment Property magazine reader Bob had exactly this question. So the editor turned to Philippe for his expert opinion.
My wife and I have been buying property over the years and are now looking to retire. I am 57 and will have a government PSS super pension at 60 of about $50,000 per annum. My wife, Karen, is 55 and has approximately $100,000 in her super fund.
We are trying to work out which properties to sell in order to generate some positive cash flow, while at the same time keeping some property for future gain. Can you suggest a way forward based on our portfolio?
We also want to sell our PPOR next year and buy another smaller house in Canberra for up to $850,000.
Decisions about how you organise your retirement involve many variables, and the trick is to cut through the number of ‘what if’ scenarios you are faced with. The following are my thoughts and the way I would approach retirement, and should not be construed as ﬁnancial advice.
In your case, let’s look at what you have:
Given the above, you need to work out what your lifestyle is going to be when you retire. Are you the active type? What kind of hobbies do you have? Do you plan to travel extensively overseas? Will you buy a motorbike or take up skydiving? Or will you just look after your garden and read books? Depending on your plans, your budget can vary widely.
In other words, is $55k per year in annual income going to be enough? If the answer is yes, then you can keep your portfolio for now and, over time, dispose of one property at a time and indulge in some pleasurable activities (a cruise around the world perhaps, or renovating your home) with the proceeds of sales.
If you intend to have a more expensive lifestyle, then you will need to have a more sophisticated plan, as you’ll need to top up your $55k annual income.
First, you need to decide how active you will be, and for how long, and then come up with a number in terms of the yearly income you would want.
Also, as you grow older your lifestyle will reduce. For example, if your hobby is to ﬂy small planes, at what age will you stop ﬂying? At some point, your budget will change from one that supports an active lifestyle to one that suits a more passive one, and you need to allow for this so you have more to spend when you are still active.
These are sometimes hard topics to face, but it pays to be realistic!
To fund this plan you need to scale down your portfolio. This is because the most effective way to access equity is to sell the asset. Overall, you have about $1.6m in equity across your portfolio, in addition to the $375k downsizing proceeds.
Once you have calculated how much you will need, you can work out the timing of your property portfolio disposal. You should seek advice from an accountant, as tax considerations will also drive the timing of selling your properties. Disposing of the portfolio over time will almost certainly be less taxing than selling everything at once.
My other comments are:
In summary, you need to do a fair bit of brainstorming about what your life will look like after retirement, and then consult a good accountant and ﬁnancial planner to set up an effective plan and timetable that will deliver your expectations. And please don’t tell me you want to leave something for the kids! Just enjoy your retirement. You worked hard for it!