Show notes – Crafting a Personalised Plan for Retirement Success: Boosting Cash Flow, Scaling Back Work and Strategic Downsizing (Ep. 278)

Episode Highlights

0.56 – Georgia reached out to Dave’s team because she’s wanting a bit of support with managing her two investment properties and navigating her property decisions

5.25 – Timing for Georgia is important too. Dave details the plan to enable Georgia to drop one day of work per week.

11.18 – Georgia considered selling one of her properties to fund her cashflow.

17.33 – Who actually tracks their living expenses?

20.28 – Next week’s teaser: September Monthly market update

26.19 – Dave shares the three scenarios

40.24 – Gold Nuggets

Show notes

Today’s episode is a great case study. Georgia is stating to feel the strain of managing her two investment properties and she wants to make sure she makes the right decisions now so that she can enjoy her retirement.

Georgia is currently 52 years old, no kids, living in Sydney, renting, and working four days a week.

She owns two investment properties: one in Pagewood, in Sydney’s East, and the other in St Leonards, on the lower North Shore.

Together, these properties are worth around $2.86 million and bring in a gross rental income of $82,000 a year.

Her plan has always been to eventually move into the Pagewood property, but she’s not sure when she’ll be able to do that – this was a key question she wanted answered.

The Pagewood home has a lovely garden, but it’s going to need a lot of upkeep—something that might be challenging for Georgia as she gets older.

So, while she’s thinking of moving into Pagewood for a while, she’s also aware that at some point, she will need to downsize to something more manageable.

Starting with her concerns

• Georgia really stretched her borrowing capacity to purchase the Pagewood property back when interest rates were low.
• With rates climbing over the past two years, her cash flow is now under serious strain. She was set up with a principal and interest repayment, and the rate rises have bumped up her monthly commitment by almost $3,100. While she does have some cash reserves, she never anticipated such a drastic change, and it’s starting to take a toll.
• The financial pressure is causing her stress and impacting her lifestyle. She feels guilty when she spends money. Given expenses and repayments are so high, she now has no cash flow surplus each month.
• Her offset account balance, which is currently sitting at $285,000, had been growing nicely in the past, but now she’s concerned because her savings aren’t increasing. She’s really struggling with the mental challenge of navigating through this period with no extra cash each month.

Georgia’s questions for our Property Planning team include:

• Can I manage to hold onto both of my investment properties?
• If so, for how long?
• Will my cash flow improve in the long run—basically, is there light at the end of the tunnel and is it worth battling through the short-term pain?
• What will the long-term outcomes be if I hold on? Is it worth the mental anguish and financial stress now for a better future?

She wanted to ascertain the Property performance and model out and consider a potential sale to free her up financially.

• In Georgia’s words, the St Leonards investment hasn’t done a lot in terms of capital growth, and the numbers tell us the property has achieved 3.1% p.a. in growth during her time of ownership since 2012. While this is not a poor return, Georgia has no plans to live at St Leonards and is also concerned about the level of development occurring locally, which could impact the demand for her property. She was very clear that this was the property to sell, if she had to make that decision.
• Pagewood, the more recent purchase, is the property she wishes to hold, mainly as Georgia intends to live there in the future and she has more confidence in the area. While she noted accurate performance data is important, she very much wanted to trust her gut and make the decision she was happy with.
• Additionally, this property has performed strongly (8.5% p.a. growth) with an increase of $500k in equity since she purchased in 2020, however this is a time where the overall market has been strong so that needs to be factored into the equation. This is in a great area for Georgia’s lifestyle and is close to family, which also played a part in her decision.

Georgia would like to scale back work in about five years— she is currently working 4 days a week and would like to go down to three in the year 2029 when she will be 57

She’s also aiming to retire by 2032 when she is 60, giving her another eight years in the workforce.

Georgia is in a financial predicament that I believe will be more common than many expect.

She’s on track for a comfortable retirement, thanks to her superannuation balance, but right now, cash flow is a real struggle. This is likely to become worse considering her plans to scale back work in 5 years.

She knows that holding onto her properties will mean a stronger asset position when she retires, along with more passive income, so she’s resisted the temptation to sell so far.

But the flip side is that living with a tighter budget and having no surplus cash flow is really starting to wear on her. The mental and emotional strain of this is becoming harder to manage.

Georgia understands she could go and sell one or both properties tomorrow and be eased of her cash flow pressures.

But because she enjoys what she does, she’s also open to the idea of stretching her working years a bit longer if it means securing her financial future.

For instance, she’d be willing to keep working at a reduced capacity for an extra two to five years if it meant she’d be financially set when she finally does retire and move into her Pagewood property.

On the other hand, if she could scale back work earlier and still be financially comfortable, that would be great news!

You know, one interesting thing Georgia mentioned was that she’s comfortable with the idea of dipping into her savings to fund her lifestyle if needed.

But here’s where it gets interesting—a good Property Planner would pick up on the fact that this mindset seems to contradict how she’s feeling right now. She’s stressed about her cash flow and the idea of having no surplus each month, yet she believes she’ll be okay using her savings down the track.

This is exactly the kind of thing we’d want to unpack with her. It’s important to understand why she thinks she’ll be comfortable with this in retirement, given the discomfort she feels at the moment.

Often, when we take the time to rationalize and really think through our feelings about money, we can shift our mindset. But let’s be honest—it’s not always an easy process. Recognizing these contradictions is key to creating a plan that truly works for someone, both now and in the future.

Financial Overview

Income –

• Georgia: $175,000
• Rental Passive Income: $82,000 gross income
• Net Cash flow on properties: -$83,600 (meaning her repayments and holding costs $165,600)

Cashflow and Savings –

• Living expenses: $3,500 p/m
• Rental cost – $1,300 p/mth (living in a house with girlfriends)
• Monthly savings: $0 p/m
• Total Available Savings: $285,000

• Super: $380,000
• Investments (Shares/crypto): $0

Property #1 – INV – Pagewood, NSW

• Year Purchased: 2020
• Value Now: $1,960,000
• Debt: $1,238,000
• Equity: $722,000
• Mid-term home: plan is to move in but then downsize eventually.
• Currently on P&I at 7.60% as she stretched her Borrowing Capacity to purchase this property when rates were low. This is putting significant strain on her cash flow.

Property #2 – INV – St Leonards, NSW

• Year Purchased: 2012
• Value Now: $900,000
• Debt: $365,000
• Equity: $535,000

Overall Property Value and Equity 

• Total Property Value: $2,860,000
• Total Property Debt: $1,603,000
• Total Equity in portfolio: $1,257,000

• Total LVR = 56%

Overall, despite wanting the choice to scale back at 57 and retire at the age of 60 (young in today’s environment), only 8 total years away, from an initial assessment you can see that she has a few things in her favour for achieving her goals:

1. A reasonably strong income
2. No dependants.
3. A strong savings balance
4. Good money management habits as living expenses aren’t out of control.
5. Excellent equity across the two properties of $1.25m.
6. A solid super balance which will continue to rise while she earns a strong income.
7. The plan to downsize her Pagewood property at some point, which provides the opportunity to add extra cash into super with the “Downsizer Contribution”

1. 1. You must be 55 years or older and have owned the home for at least 10 years before the sale.
   2. The home must be a qualifying primary residence, which means it must be exempt (wholly or partially) from capital gains tax under the main residence exemption.
   3. The downsizer contribution is capped at $300,000 per person, or $600,000 per couple. This is on top of the normal contribution caps and doesn’t count towards your non-concessional contributions cap.

Property Sale

Georgia was considering selling one of her properties to help with her cash flow. Can you walk us through your approach with her regarding this decision?

The first thing we did was model Georgia’s current situation to get a clear picture of her likely outcomes over the next several years and beyond.

The big question was whether there was a way for her to keep both properties and for her cash flow to  improve.

What we found was that, while her cash flow would improve year on year due to increases in rental and employment income, the improvement was only marginal by about $80 per month, with that amount indexed each year, and while that would help, Georgia remained uneasy with the outcomes.

The impact of rising interest rates really hampered her borrowing capacity, making it impossible to refinance her current debt onto interest-only repayments.

But perhaps most importantly, Georgia realised she just didn’t have the appetite to keep managing both properties and barely scraping by, all in the hope of a stronger financial position in the future.

Ultimately, it’s a deeply personal decision. This is where understanding our clients risk appetite and personal characteristics are so important, and why creating your own personalised Property Plan is crucial.

Not everyone’s situation is the same, and each plan needs to be built from the ground up, considering your unique circumstances, risk tolerance, and timeframes.

If Georgia had a longer timeframe, she might have been more open to holding onto both properties.

Her preference was to keep Pagewood if she could, as she was extremely happy with property so the next Property Planning journey we modelled was doing this and selling St Leonards.

From the financial modelling Georgia felt empowered to sell the St Leonards property and relieve her cash flow.

This move immediately improved her cash flow by around $12,600 per year.

From there, Goergia had the borrowing capacity to refinance to a major lender with a sharper rate and move onto an interest only repayment, improving her cash flow savings by just shy of $1,600 per month (before any offset balance has been considered).

But the real game-changer was the proceeds from the sale—after covering all the costs and taxes, she walked away with $540,000 and meant she now has beyond $800,000 in offset, which significantly reduced her loan repayments being on interest only.

In fact, the use of an offset helped Georgia to reduce her repayments by approx. $3,900 per month, and this number would continue to grow as her offset grew.

This three-fold benefit was huge.

Extra cash in the bank

Improved cash flow by paying off one mortgage

Refinancing from P&I to interest only

Her cash flow improved dramatically, boosting her savings to $6,500 per month (or $78,000 per year) after the St Leonards sale and Pagewood refinance settled.

Such a drastic change to her cash flow delighted Georgia and while there was some gross rental income lost, these decisions have allowed her to take control of her finances and begin saving again, a reality she had not experienced for some time and a welcome change.

Modelling Assumptions

In terms of building out the Property Plan, what were some of the key assumptions that were built into the plan? The assumptions are so important to the outcomes, so it is important that she is slightly conservative, and realistic?

For her property at Pagewood, NSW we assumed:

• Capital Growth of 5% pa
• It was purchased by Georgia for $1,415,000 in 2020, therefore growth of 8.50% p.a. this far – excluding any renovations or capital improvements made to the dwelling.
• Earliest sale we have been able to find, which is always the best way to get a sense of the long term performance and part of what we do with each client’s analysis was $396,000 in 1994, so assuming a current value $1,960,000 this = 5.45% p.a. growth over 31 years which is solid and further informs our slightly conservative assumption.

Some Assumptions used in the platform include:

1. Interest rate – 6%
2. Inflation – 3%
3. Occupancy rate – 92%
4. Rental yield – 3%
5. Rental increase pa – 5% in line with capital growth. Many people don’t think about this point. If you don’t model the rent increasing at the same rate as the growth, the rental yield will continue to reduce lower and lower over the years, which is what happens in the real world.

As touched on previously, the advantage of a property that performs better from a capital growth perspective is that the rental income is likely to grow faster, even if the yield is lower. This can be a tricky concept to understand.

6. Wage growth – 3%

STAGE/SCENARIO ONE – Immediate decisions were Sell St Leonards, refinance  Pagewood loans to interest only and a better rate with an offset account attached.

• She would remain renting, and Pagewood would remain an INV for a period of time before then moving into Pagewood and we trialled modelling doing this in 1 years, 3 years and ultimately 5 years.

• • • However, her loan wouldn’t be fully offset if she took this approach for another 7 years if she moved into the house in three years.
    • So we remodelled and discovered if she kept renting for around 4-5 years, instead of 3,  Georgias loan would be 100% offset and because we took this approach she would have the peace of mind of having $1,115,000 in the bank and this would continue to build and she could then look to put extra into superannuation as well to build this up faster given the great tax incentives.

• Ultimately Georgia is happy with her living arrangements, so there is no rush on moving out.
• This is also significantly better financially – $4k+ in rent income vs $1,300 in rental cost.

STAGE/SCENARIO TWO – ADDITIONAL INVESTMENTS CONSIDERATION & WORK SCALE BACK

With the sale of St Leonards, did Georgia consider making any other investments?

1. In stage 2, we modelled the idea of whether Georgia could add another investment property in to the mix with this improved financial position
   1. we discussed Georgia’s options but ultimately her risk appetite meant she was not interested in purchasing another investment property.
   2. She also liked the idea of working to become fully offset on her Pagewood property and welcomed the improvement she saw in cash flow each year from the sale of St Leonards.
   3. I think we all are breathing a bit easier knowing she will have minimal debt and this great cash flow and savings behind her.
   4. This also allows her to Contribute to Super which has great tax benefits & possible  Shares/ETF’s if she opts which might suit Georgia’s timelines and risk profile better.

• Given super and alternative assets would constitute financial advice, we didn’t go into further detail, but Georgia would have the cash flow capacity to either contribute to super or allocate funds to a share or ETF portfolio if she would like to invest further and you can go online and find out some simple information such how much is the max you can contribute each year and see the benefits of this strategy now she has the cash flow ability to do so.

So, one of the last key questions is how long would she continue to work and when might she scale back and to what degree?

Her ideal world goal is that she would like to scale back work 5 years from now by age 57 and be retired in 8 years at age 60, but she is quite flexible and enjoys what she does so there is not a pressing or urgent timeframe.

What we modelled was –

1. Reduce hours/income by 25% – so she would be working 3 days as she is 4 days per week now
   57. And we landed on starting this in 5 years time, in 2029 – when Georgia is turning 57.

1. 1. Cash Flow Outcome

• . Savings p/mth from $7,200 in 2028 down to $4,450 in 2029 but still quite good at around $50k p/a in (today’s dollars).

1. 1. Full retirement modelled for age 60 – 8 years time – 2032.
   2. Cash Flow Outcome

• . Savings p/mth down to -$100 in 2032 (today’s $)

1. 1. Super balance at retirement (2032) – $630k (today’s $) and this could be much more if she aggressively contributes to super.

• . This provides ~ $31.5k p.a. based on 5% pension from super.(today’s $)

1. Government pension to also help – money untouched in super for longer.
2. Additionally, Georgia will have an inheritance to come at some point in the future of approx. $800k.

• She also has the option to downsize the home at some point and make a large lump sum to super

Given the flexibility of work and focus on lifestyle outcomes was high for Georgia, there was a desire on her part to map out what the scale back and retirement looked like.

This was more important to her than the question of when she would move into Pagewood, or complete the downsize after that.

So, we addressed her retirement plans first.

STAGE/SCENARIO THREE – “DOWNSIZING THE PAGEWOOD PROPERTY”

So the final step in the plan was considering when Georgia should sell Pagewood and purchase the new downsizer home.

We looked at two options for when to sell Pagewood and downsize.

1. One was in 2028, aligning loosely with her scale back to 3 days per week and once she was close to fully offset.
   1. This would mean Georgia doesn’t actually live in Pagewood, she continues renting and sells Pagewood to purchase the downsizer PPOR in 3 years. Again highlighting the power of the modelling where you can play out so many different scenarios, and decisions within what is essentially a different version of the same scenario.
2. The other was move into it after 5 years as per the time the loan is full offset and live in it for 6 years after that until 2035, and downgrading to a lower cost PPOR.

• • Holding on for 7 more years until “SellPagewoodin2035” and purchase another property $1.5m in today’s $ meant –
    • New purchase Valued at $2.566m in 2035.
    • PAGEWOOD estimated value $3.52m in 2035.
    •  Still had $693k in the bank ($500K in today’s $)
      • $2,130,300 sales proceeds ($1.54m in todays $)
      • Her savings would drop by $564K ($410K in today’s $)
      • $2,694,300 in total purchasing costs ($1.94m in todays $)
    • In 2035, $693k in cash savings ($500K today), super balance $1.02m ($740k in todays $)
    • It would take 11 years for Georgia to exhaust her savings (based on existing cash flow), end of 2046.
    • At that time (2046) her super is projected to have grown to $2.13m ($1.11M in today’s $), and then she could start drawing approx.  $106 p.a ($56k p.a. in today’s $) pension (based on a 5% pension rate).
      • For context, at that time (2046) her living expenses are projected to cost $80k p.a. ($42K in today’s $) and we know that living expenses tend to reduce. She would be 74 yo.

For the third round of modelling, you explored a couple of different timelines for Georgia selling her Pagewood property.

In the end, she decided to wait until 2035 to sell for a couple of reasons, one lifestyle and one financial, which is nice to see both elements ticked off:

1. Lifestyle – Selling in 2035 meant Georgia was able to live at the Pagewood property, which she is very fond of, for 6 years and when the time is right make the move to a property that required less upkeep.
2. Financial – as Georgia was selling the higher priced property and downsizing to a lower cost property, the future value of the downsizer didn’t get away from Georgia – as can happen when upgrading, where your lower valued property may not keep up with the growth of the higher priced upgrader home – this meant she achieved greater growth in value on Pagewood than the value of her future home grew, leaving Georgia with a stronger savings balance following settlement.

Additionally, we can see Georgia is able to downsize her home in 2035 and take on no debt for the new purchase, whereas in 2029, a Loan to Value Ratio of 40% was modelled for the new PPOR.

The outcome (based on Scenario 3)

So, in summary –

At 57 (2029) going down to 3 days per week prior to retirement = $1,155,000 in cash savings ($995k in todays $), offsetting Pagewood.

She’ll be saving $5,150 per month ($4,450 per month in todays $).

At 60 (2032) with Georgia retiring = $1,266,000 in cash savings ($1M today’s $),

offsetting Pagewood,

saving about $6,000 p/mth ($4,750 in today’s $) right before retirement,

then going to slightly negative (-$100 p/mth) cash flow once retired.

At 63 (2035) selling Pagewood and purchasing new PPOR =

• In 2035, $693k in cash savings ($500K today), super balance $1.02m ($740k in todays $)

• Cash savings dropped significantly given the proceeds after clearing debts didn’t cover the full purchase price for the new PPOR and the associated purchase costs, as we have modelled no debt for the new PPOR.

It would take 11 years for Georgia to exhaust her savings (based on existing cash flow), end of 2046 at age 74 and then live off her super which will have grown significantly and all Debt free!

Gold Nuggets:

Cate Bakos’s gold nugget: “Personal finance is just that…. it’s personal!”

Mike Mortlock’s gold nugget: Mike’s vegies and dessert metaphor is apt, but in this case, he marvels at how Georgia made the vegies into dessert. Her regimented approach impressed us all.

Dave Johnston’s gold nugget: This was one of Dave’s favourite case studies and he highlights why you don’t need to own lots of properties to get a benefit out of one key plan.