Why Saving For Retirement Is A Myth
Why Saving For Retirement Is A Myth
Imagine for a moment that you were able to save up $125,000 dollars. I’m sure many of you might even have that much right now.
Now, what if I told you that you had to take that $125,000 dollars and live on it for the rest of your life.
Sounds crazy, but that’s the reality for many older Australian’s who are on the verge of retirement. The average female retiree will end up with around $125,000 while the average male will have about $225,000. That’s a scary thought.
I want you to take a moment and think about your own personal situation. How much would you need today, in order to retire comfortably?
What’s your current super balance and bank account looking like given where you’re at in life?
And more importantly, is that going to be enough to achieve your retirement goals?
How do you think you will survive without any income?
One of the best places to learn how to set yourself up is from your grandparents and parents. I remember my granny use to buy gold every time she had enough money and I used to laugh but today I see why she did it.
In reality, retiree’s today need more money than they ever have in the past. Healthcare costs are increasing year on year and the bulk of your medical expenses come in your later years. While the cost of living, particularly in Sydney and Melbourne is at record levels and only going up. That means you need to be prepared and have plenty enough tucked away.
The problem is, saving alone isn’t going to get you where you need to be.
While Australia currently has record low interest rates, that also means your typical savings account is not even covering the impacts of inflation. Similarly, wage growth is so low at the moment, that in real terms we still aren’t making any headway towards higher wages.
If your plan is to save for your retirement, then you’re never going to get there. The idea of savings is effectively a myth.
Planning for your retirement is something that needs to start today, whether you’re 20 or 55.
Ultimately what we’re talking about here is simply wealth creation. We need to implement strategies that will get our money to work for us and more than cover the impact of inflation.
Property is obviously my preferred means of investment for wealth creation because it is “real”. Investing in a balanced portfolio of stocks and bonds is another such strategy and one that most Australian’s already use through their compulsory superannuation contributions.
However, the means of building wealth through property is not quite the same today as it was 30-50 years ago. In the past, we could simply buy a property and hold it forever and that has been the retirement plan for many baby boomers.
As millennials today are quickly finding out, baby boomers have lived through arguably the greatest period of economic growth that we’ve seen in the developed world of recent times. Australia as its nickname suggests certainly has been ‘the lucky country’ for baby boomers.
But the property market isn’t what it has been in the past. We are looking at potential changes to negative gearing as well as ever-tightening credit conditions. This is having a material impact, particularly on many investor-driven markets. There will be on-going change no matter what, so the trick is to stay ahead of the game and find your way.
We are reaching the point where we need to be a little smarter in the way we approach our property investments to make sure we are able to achieve our goals. Which for most people is really just a comfortable retirement.
Let’s be clear. There will always be a demand for housing. People always need a home and as our population continues to grow that need will only ever increase. In fact, the number of renters in our major cities only continues to grow. 25.7 per cent of Australian’s used to rent in 1994-95 and that figure is now well above 31%.
As a result, the change we need to make is the strategy that we are using.
In the current market, I’m speaking to my clients about not being afraid to buy and sell properties. Our goal is to identify areas that are primed for capital growth and then purchase properties that will reap the largest benefit.
In most cases that is going to be houses with good bones on large blocks of land.
Many investors run into the problem of simply not being able to afford the high costs to carry capital growth properties and as such are drawn to yield. For the most part, these high-yielding properties are going to be apartments and units.
My thinking is that in most cases properties with strong rental yields often aren’t as high as they first appear. Once we factor in the costs of property management, cost of funds, strata fees, council and water rates and maintenance, compliance those high yielding properties can often not be as attractive as we might think. The same goes for granny flats. Count all the costs above, reduce the rent of the main property by 5% which is a reality and then see for yourself if it works. I’m surprised how many investors actually make good returns on them. This strategy only works for certain people at a certain stage of life.
We also have to remember, that units are almost always going to underperform, houses and land. Units are the last to rise in price and the first to fall.
I suggest that if your goal is long-term wealth creation, then focus on areas that are primed for capital growth and do your very best (within your means) to purchase properties with a large land component below market value. Then continue to look to new areas primed for capital growth that will see you maximise your return on investment.
It’s always worth keeping in mind the cash-on-cash return with this type of strategy. If you purchase a property for $500,000 and that property increases by 10%, then after costs you are looking at a return on your cash investment of around 25%. Which is a far higher return then you’re likely to achieve elsewhere and certainly more than a savings account.
You might find fortune tellers telling you about booms and busts and hidden gems and charging you fees in the process. It is just simple math and not rocket science.
If you do that and don’t let your savings whittle away in a bank account, you’ll be far better off in 20 years time than the vast majority of Australian's and well on your way to a comfortable retirement.
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