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Investing In Shares vs Property

Investing shares, versus investing property. Great question. I’m a big believer in diversification, so if we had the propensity, why not do both. One way to look at it is, we could look at our super, over here, as our share or our stock component of investment. And then in now own name, we could move that property as our investment to diversify our assets. Now, why do we want to do that? It’s all about risk minimization and I can spell. Now, this is a perfect time to be talking about risk mitigation because we’ve got the Coronavirus and the impact that it’s had on the stock market. There have been some of the biggest dramatic losses in the stock market, in history through the Coronavirus issue. Now that doesn’t mean that buying stocks is horrendously bad. It just shows that it goes through volatile lines and the market will rebound in time, but depending on our age, it could be impactful.

However, if we talk about investment in property, the property has its own risks associated with it, but the extreme volatility is not as prolific as we can say with the share market. You could say, every guy could argue that 2019 with the Sydney market, had a correction and dropped. Yes, the Sydney market did and different markets in the property have different seismic graphs. So, that might be Sydney, with obviously [inaudible 00:01:49] way to dramatic, but let’s go there. But, then you might have a city like Adelaide, which is more steady, but without the traumatic lines through it. But, what happens is by having some property available in your portfolio and also having shades portfolio, what we’ll find is that our risk is mitigated. So, let’s say in 2020, we’ve all fifty percent of one-million in super and property. Well, fifty percent of one million, and we had a thirteen percent drop. That means our Five-hundred-thousand portfolio, would be down to 3.50.

Property prices for the month of March in 2020 actually went up. [inaudible 00:02:40] Let’s just say a flat line and stay even. So your five-hundred-thousand dollar asset is still Five-hundred-thousand. Now you can pay, if you had that whole million just in the stock market and it had a 30% fold, our portfolio would be around six-fifty to seven-hundred-thousand, right? Compared to having diversity in your portfolio. We’ve only lost one-hundred and fifty, and remember the one tip to remember, you only lose if you sell. So the biggest problem investors have is we panic and we sell when the market goes down. Sometimes we need a whole of our nerve and white for the market to correct. So, old markets work on a business cycle [inaudible 00:03:36] and generally, that’s a 10 year period. You think about it, GFC was about 10 years ago.

We had a crisis just before the GFC around 2000 dot com crisis. 1991 we had the recession. We had to have every 10 years says a major correction. We just need to be prepared for it. And it said that’s going to happen in structure our portfolio wisely. So, therefore, what do I recommend, on a general nature, not specific to anybody? Have a diversified portfolio, which includes some property. And then depending on how much money, you might have different properties in your portfolio. You might have an old house to subdivide a townhouse with a tax and a [inaudible 00:04:25] package with tax. In super, you might have money in shares, you might have some money goal and you might have money in resources. Direct, it’s all about Diversity.

Surround yourself with the right financial expert no matter when it is an investment in shares or investment in property, that can guide you in all aspects. Not every property person can help you with shares. And not every share person can help you with the property. And not many tax people can help you with shares or property. So make sure you surround yourself with the right team, to get you the right outcome, for what you’re looking to do.

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Most people nearing retirement age in Australia do not have sufficient funds in their superannuation to retire comfortably. This is a huge problem, how much do you need in your super to retire without concern?

The Big Issue For Baby Boomers

Surprisingly, 74% of Australian baby boomers are unsure how much money they will need in retirement, many think that the age pension will be sufficient.

The Australian Bureau of Statistics (ABS) state that there are almost three million over 50’s working, this equates to 28% of the overall national workforce.

The majority of over 50’s nearing retirement age will have to consider alternative funding sources because most will not have sufficient funds to retire comfortably. This is largely due to the fact that the broad-based superannuation system only came into existence in 1992.

Many over 50’s are recognising the importance of taking control of their financial future by investing in property.

How Much Do You Need To Retire Comfortably?

Some financial experts state that retirees would need to have at least $1,000,000 in superannuation when they retire to live moderately.

However, if you want to live a comfortable lifestyle, you would need significantly more than $1,000,000.

Couples:

Opinions differ when it comes to pinning down an estimated lump sum needed to retire comfortably with some financial professionals stating that a couple needs to generate a yearly income of at least $60,604, they need to have at least $575,000 minimum lump sum in their super to live comfortably, investment returns should be at least 5% per year.

Coupled with PART Age Pension, a couple should be able to live comfortably.

Singles:

A single person would need to earn at least $42,953 per year, with a super lump sum of $505,000  with investment returns of 5% per year.

Millions of Australians will need to seek alternative income sources to fund their retirement, only 10% of Australians have super accounts with more than $100,000 in them.

The Association of Superannuation Funds of Australia state that based on the average superannuation balance and current average income of 35-44 year olds, the estimated superannuation payment for a male would be $183,000. A female would receive an estimated $93,000.

Bearing this in mind, how much money do you need to retire without worrying about your finances?

The lifestyle that you choose to lead will determine how much you are going to need. If you want to live extravagantly, you will obviously need more than someone who wishes to live a simple lifestyle.

If you want to live comfortably, it is vital that you start planning your financial future now.

Taking the current information regarding superannuation into consideration, super alone will not provide you with enough funds to enable you to retire comfortably. Therefore, you should start looking into other ways of boosting your income, property investment is a good place to start.

How To Boost Your Finances For Retirement

Spend Less Than You Earn

If you want to become financially free for your retirement, you will need to spend less than you earn. Take a look at your outgoings and expenses and find ways of cutting down on spending.

Smart Investments

Invest the money you save wisely, most Australians will earn approximately $4-5 million throughout their working life however, the majority will retire on a very low retirement income. The fundamental difference between someone who retires wealthy and someone who retires poor is the amount they save and invest.

Reinvest

Reinvest the investment income, build wealth by creating compound growth. Your earnings will not be sufficient to build financial independence.

Repeat

Keep investing and reinvesting to build capital growth and passive income that will work for you when you retire.

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The one thing I wanted to talk about today is your super and potential withdrawal. Potentially refinancing instead. So you’ve got to think about it strategically. The share markets dropped, which means your balance in super, or the value has dropped, but you haven’t realized that value decrease because you haven’t sold anything. So it gives you a greater opportunity when the market rebounds and increases again that you actually grow your wealth more in super by keeping it in the super. Year on year the average returns are around 7% to 9% depending on what fund you have it invested in, whether it’s high growth to balanced. But I saw an Australian super came out recently and said their balance was averaging, over a 10 year period, 9% returns.

Now, so I do think if we use that example of the super and 9% returns of a growth balanced fund for a 10 year period, and the cost of refinancing is 2.5% to 3.5%, well it seems to stand out quite significantly, that the financial decision that we need to make is quite obvious. That we’re better off refinancing $20,000 if we can on our loan, compared to taking that $20,000 out of our superannuation and realizing the losses that we have in super. Because the cost to us of $20,000 being topped up onto our loan is negligible. We don’t even have to have that money used there. We can actually have our loan and then have two offset accounts. There are some products that would have multiple offset accounts. We do have day to day living in one, and this showed up that we have the 20K sitting there.

So, if we do have job losses in our family network and we can’t afford to pay our mortgage, we can do this. Because yes, you can talk to the bank about deferring you mortgage for six months, doesn’t mean the government will allow it. Whereas this will create a safety net for you. Not only that, if you do try to defer your mortgage, what I’ve been hearing is some banks are saying they’ll allow it, but they’re keeping your loan term the same and they’re going to increase the amount of repayments that you have to make in a shorter timeframe by six pounds. So there’s different strategies you can go down, but to me, the logic one is, take advantage of the low interest rates compared to drawing your money out of the super at 9%.

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The consequence of not having sufficient retirement savings is trying to survive on an income well below the poverty line. To overcome a lack of income, you have the option of remaining at work until long after retirement age, selling assets you might not want to sell, or learning to live a lifestyle that matches a poverty-line income.

So how do you beat these statistics and ensure that you have enough money to enjoy a comfortable lifestyle during retirement?  Here are some tips for improving your retirement circumstances:

Don’t rely on your main residence

A large percentage of Australians believe that their family home is the biggest asset they’ll ever have. While your home is a strong asset to have, it also doesn’t provide an income for you during retirement.

Once you reach retirement age and you’re considering ways to increase or supplement your pension income, your home may be the only option available to you.  Selling your home might provide some cash in the short term, but it also leaves you looking for somewhere else to live.

The alternative is to look for ways to build wealth outside of your family home.

Pay off your mortgage

The longer it takes you to pay off your home mortgage, the more interest you pay overall.  If you’re paying only the minimum payment due on your mortgage each month, you’ll end up paying 30 years’ worth of interest.

For example, if you owe $300,000 on your mortgage at a 5% interest rate and you take the full 30 years to repay it, your minimum payments will be $1,610 per month. Over the full 30 years, you’ll pay a total of $279,767 in just interest on top of repaying the original $300,000 you borrowed.

However, if you can find a way to repay your mortgage faster, you’ll reduce the amount of interest you pay. Make additional repayments whenever you can. Use an offset account or line of credit to minimise your interest charges. Learn some smart investment strategies that can help you pay down your loan faster.

Avoid over-spending

Marketing companies use strong tactics to ensure consumers spend money, even when they can’t afford it. In fact, it’s become common for many people to pay for things they want with credit cards or personal loans when they don’t have ready cash or savings to cover the costs.

Unfortunately, making repayments on credit card or personal loan balances reduces your ability to pay off your mortgage faster. Spending your income paying for personal debts also stops you from investing into other assets that could be building your wealth.

Contribute extra into super

Contributing even as little as an extra $20 per week into your super can increase your balance on retirement. When you think about it, $20 per week over 10 years adds up to an extra $40,000 in your super balance.

There’s also the benefit of compounding to consider. That $40,000 extra contribution from your salary doesn’t include any growth over that period of time.

It’s also worth looking at how your super investments are structured. Most superannuation funds allow you to determine the asset allocation structure you prefer to suit your risk profile.

For example, if you’re in your 20’s you might consider choosing aggressive investments, such as high-growth. By comparison, if you have a conservative risk profile you might prefer to consider more carefully how your super is invested so you get the best bang for your buck.

Diversify your investment portfolio

Investing in property is a popular wealth building option for many Australians. However, it’s not always as common to see Aussies diversify their investment portfolios into other asset classes.

Investing into shares provides the option to earn dividend income. If you’re not risk averse, you might consider gearing your share portfolio to increase the opportunity for growth. If you’re not confident investing directly into the share market, you might prefer to invest into managed funds or share portfolios that can help hedge your risks.

There are a number of different investment options available, so think about ways you might diversify your wealth to take advantage of various markets.

Seek advice to avoid pension poverty

Far too many Australians attempt to do everything themselves, believing they can save a few dollars instead of spending money on professional advice. They may act based on free advice given by a well-meaning friend or from information they’ve found online.

However, if you don’t know what you’re doing you could be at risk of losing your investment. There’s also the risk of structuring your investments incorrectly, which could cost you more in tax liabilities and additional costs down the line.

To help avoid pension poverty pay for advice from a professional adviser. The information you learn could benefit your wealth creation efforts and make it easier for you to achieve your financial goals.

If you want to retire with a comfortable income that lets you live above the poverty line, keep these tips in mind. Even taking small steps towards reaching your goals can compound into a better retirement lifestyle in the long run.

For further information or advice on creating wealth for your retirement call Nieuvision on 1300 832 554.

MORE INFO:
Rick Nieuwenhoven
CEO
e: rick@nieuvision.com.au

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