Retirement is one of the key reasons investors turn to property in the beginning because they understand the benefit of leverage and capital gains.
Make no bones about it, retiring with a sufficient income at a reasonable age is subjective, but in any case, it takes a lot of capital to make it possible.
Property investors used a calculated investment approach when it comes to retirement.
There are two different approaches to take at retirement for property investors:
Consuming capital and income
Consuming interest only
What does this mean?
Consuming Capital and Income
This approach involves building up your net worth from your current age up until your anticipated retirement age and then living off the income & capital derived from the assets.
In practical terms, the investor sells off their assets from their retirement age throughout the retirement years in order to subsidize the income they want to have during their retirement.
Essentially, you're consuming all the capital you have built up over your working life in order to fund your retirement.
If you reach this level, your income in retirement is taken care of but you have burnt away your net assets and your so-called “nest egg" so there is little or nothing for your kids/family to inherit when you pass.
This is generally regarded as the minimum threshold for retirement.
So, how do you achieve this?
Property investors strategically purchase property during their working years by leveraging off the bank to continually buy at different points in the market and across a diverse range of property types.
This constant investment is where capital gains are made and what forms the basis of your retirement plan.
Being in the property market for as long as possible to make as many gains as possible is a key requirement for a lot of investors because 99% of the wealth they have in property comes from capital gains - not from cash flow.
Calculating this goal is the next piece to the puzzle.
Let's assume that John & Mary Smith are currently 40 years old, own their own home, both have moderate KiwiSaver balances, and want to replace their net income of $100,000 by age 60.
Here's how it would look:
This calculation shows that John & Mary requires $2,677,305 as a lump sum at age 60 in order to have $100,000 of income from age 60 through to age 90.
This isn't the full picture though, we also need to factor in their current investments.
Assuming they both have KiwiSaver balances of approximately $30,000 (in today's money), we can estimate (using the sorted.co.nz retirement tool) that the balance of their KiwiSaver at age 65 will be approximately $296,000 each.
Therefore, we can calculate their current shortfall to their retirement goal:
Even with KiwiSaver factored in, John & Mary still have a $2,085,305 shortfall to the minimum retirement threshold.
This is calculated by subtracting their current investments from the goal figure in the first box.
Consuming Interest Only
The income-only retirement approach involves building up your net assets over your working years and then living solely off the income that is generated from your investments.
The difference between this and the capital and income approach is that you have to build a much larger net asset base in order to reach this threshold at retirement.
Because you’re only living off the income generated from your investments, you don’t have to consume any capital during your retirement years, so you preserve your nest egg, and you can pass this on as an inheritance to kids/family.
This is generally regarded as the upper threshold to get to for retirement - a nice to have, rather than a necessity.
Getting to the upper threshold is done in the same way as before, except you need a larger net asset base to meet the threshold.
Now let's consider how we can calculate our goal.
Using the same example as above, here's how it would look:
This calculation shows that John & Mary requires $3,832,019 in net assets at age 60 in order to generate $100,000 of income from age 60 through to age 90.
Again, let's factor in their current investments:
Even with KiwiSaver factored in, John & Mary still have a $3,240,019 shortfall to the upper retirement threshold.
Since this number is a lot higher than the first example, John & Mary will have to make more investments over their working year to reach this threshold.
Lastly, let's factor in one property investment and see what difference that makes to John & Mary's retirement shortfall.
Assuming they purchased a property now for $600,000 and it generated 5% capital growth annually, this would put the net equity of that property at approximately $992,000 at age 60.
All of a sudden, John & Mary are much closer to achieving their retirement goals.
Investing in property is one of the easiest and most effective ways to increase your net assets over a long period of time.
So, by strategically purchasing investment properties over your working years, you can put yourself in a position where obtaining this level of net assets is achievable and your retirement goals will be attainable.
What do we do?
We help Kiwis build wealth through property investment. Our advisors will take the time to understand your individual needs and recommend suitable investment properties to help you build wealth and set up your retirement.
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