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This is the first in a series of articles based on goal setting. One of the most important areas we cover in the Property Investment course is that of setting your own goals. I break down these goals into six different categories:
• Retire richer
• Retire earlier
• Supplement your income
• Work part-time
• Give up your day job
• All or some of the above!
This week we start with the goal of wanting to retire richer.
As remarkable as this may sound, retiring richer is the easiest of the goals to achieve. All you need to do is buy and hold property. Let me illustrate with an example below.
If you bought a $400,000 property, borrowed the whole amount and took out a 20 year principal and interest loan, you will own a freehold property in 20 years time.
How much will this property be worth in 20 years time I hear you ask? There is a saying that property doubles every 7 to 10 years which may or may not be true depending on the particular asses you have purchased. If we take the view point that you have chosen a well performed asset with the right characteristics to drive capital growth and base our figures on the property doubling every 10 years, this property will be worth $1.6 million in 20 years time. Unfortunately due to inflation, $1.6 million in 20 years time is not the same as having $1.6 million today.
The more important question you should be asking is “How much will this property be worth in today’s money?” i.e. take out the inflationary component. In today’s money, a $400,000 property today will be worth $582,724 in 20 years time.
The reason this $400,000 property grows in “real” terms (in economic speak, “real” means excluding inflation) is that historically, property increases on average at 2% above the inflation rate. One of the reasons investors buy property is because it is a great hedge against inflation.
I can hear you asking another good question! So, how much will I need to retire on? A generic approach that many financial planners and retirement experts suggest is that you should have 14 times your salary to retire on. Let’s assume that your income is $50,000 per annum, this means that you should be aiming for a retirement nest egg of $700,000.
I have included a table below so that you can work out how much property you need to buy so as to retire on the equivalent of $700,000 in today’s money.
Years
to
Retirement……….Value of Property
Year 1……………..$700,000
Year 2……………..$686,274
Year 3……………..$672,818
Year 4……………..$659,625
Year 5……………..$646,691
Year 6……………..$634,011
Year 7……………..$621,579
Year 8……………..$609,391
Year 9……………..$597,442
Year 10 …………..$585,728
Year 11 …………..$574,243
Year 12 …………..$562,983
Year 13 …………..$551,944
Year 14 …………..$541,122
Year 15 …………..$530,511
Year 16 …………..$520,109
Year 17 …………..$509,911
Year 18 …………..$499,912
Year 19 …………..$490,110
Year 20……………$480,500
If you want to retire on the equivalent of $700,000 in 20 years time, you need to purchase $480,500 of property today. If you want to retire in 15 years time, you need to purchase $530,511 today.
You may wish to retire on a larger sum of money and lead a better lifestyle. Let’s assume you want to retire on the equivalent of $1,000,000 in today’s money.
Years
to
Retirement……….Value of Property
Year 1…………….$1,000,000
Year 2…………….$980,392
Year 3…………….$961,168
Year 4…………….$942,322
Year 5…………….$923,845
Year 6…………….$905,730
Year 7…………….$887,971
Year 8…………….$870,559
Year 9…………….$853,489
Year 10…………..$836,754
Year 11…………..$820,347
Year 12 ………….$804,262
Year 13…………..$788,492
Year 14…………..$773,031
Year 15…………..$757,873
Year 16…………..$743,013
Year 17…………..$728,444
Year 18…………..$714,161
Year 19…………..$700,157
Year 20 ………….$686,429
If you want to retire on the equivalent of $1,000,000 in 20 years time, you need to purchase $686,429 of property today. If you want to retire in 15 years time, you need to purchase $757,873 today.
I need to point out that you won’t be retiring on the rent from one investment property. You will need to sell the property and live off the proceeds and interest. I have tried to keep the calculations simple and assumed that you have bought the property in a Self Managed Superannuation Fund and you will pay no Capital Gains Tax (CGT) when you sell it. If you have bought in a different entity and are required to pay CGT when you sell it, you need to do buy slightly more expensive property so that some of your proceeds can go towards the CGT.
Summary
To retire richer, you should buy property, hold it and pay off the mortgage(s). As you can see from the figures above, even if you want to retire on the equivalent of $1,000,000, potentially all you need to do is buy one or two properties today and pay them off.
If you want to know more about goal setting and gain knowledge of strategies to achieve your goals, you should enrol in Property Planning Australia’s University endorsed Property Investment course which I lecture in or sit down with one of the team for a complimentary property plan meeting! I hope to see you in class.
• Written by Peter Koulizos, university lecturer, author and buyers advocate.
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