How do I avoid poverty in retirement?
More than one-third of Australian pensioners are living below the poverty line, making the country amongst the worst performers in the world for the financial security of older people.
A staggering 2.25 million Australians still rely on government support in retirement. Despite pension reform and recent increases, the base payments are excessively low and do not keep up with increases in the cost of living. The annual payment for a single person is about $22,000 and $34,000 for a couple.
But there are a range of methods you can use to avoid living in poverty during retirement, even if you are an average income earner.
Start saving for retirement as soon as possible
It is possible for an average income earner in Australia to build enough for their own retirement, but it is critical to start while you are gainfully employed and as soon as possible.
The Australian Superannuation Fund Association reports that in order to live a comfortable lifestyle the average single Australian needs to retire at $42,000 per year. To live a modest lifestyle, they quote $23,695. So, Australia’s pension is below even a modest living.
To produce $50,000 per year in retirement you need approximately $1,000,000 invested in an income producing asset. Most Australian’s cannot save $1,000,000 in their lifetime. To avoid retiring below the poverty line, you’ll need to do more than just put your money in the bank. It is critical that you start putting your money into investments that will accelerate your savings. One of the biggest contributors to performance is time in the market. In fact, the biggest mistake you can make, is to wait. It is never too late to start and starting as soon as possible could spare you from struggling in poverty during retirement.
Start voluntarily contributing to your superannuation
One avenue for retirement savings is Superannuation. According to the Australian Bureau of Statistics, the average income in Victoria is $75,000, so the average superannuation contribution is around $6,750. According to the Super Guide, “since (the) Superannuation Guarantee was introduced more than 25 years ago, the average long-term median return generated on a balanced super fund is 7.4% a year” (www.superguide.com.au)
If you were to contribute $6,750 to your superannuation (in other words, ‘salary sacrifice’) for the next 30 years and achieve a return of 7.4% per annum within the fund, your assets within superannuation would be approximately $650,000. On a return of 5%, this would produce an income of about $32,000 per annum. Assuming average inflation of 3%, this would equate to an income of $23,000.
If you can afford to contribute more to your super fund, you could increase your contribution to double or $13,500. This would produce an asset base of $1,370,000 in 30 years or an income of $50,598 after the cost of inflation.
I cannot afford to double my super contributions – what can I do?
There are two key problems with voluntarily contributing extra money to superannuation. Most people can’t afford to double their superannuation contributions, but many want to retire on more than $50,000 per annum. Most of us don’t have enough left over at the end of the week to pay our bills, so how are we supposed to enjoy our lives (while we can) and also build a retirement strategy?
From our view, it is critical to accumulate wealth in addition to your superannuation to ensure you can retire above the poverty line.
Use borrowed money as leverage
In our experience, the only way for most Australians to get ahead is by using other people’s money and the money that they pay in tax. Indeed, it is possible to increase your financial position using borrowed funds, better known as leverage.
One way to leverage your investments is through a margin loan that purchases shares. This is a very effective way to increase your investment position. A problem is that the amount that institutions will generally lend is limited, given the volatile nature of shares. If the shares reduce in value, investors may end up with borrowings above the allowable loan to value ratio (LVR – i.e. how much they will lend you against the shares) and receive a margin call – a demand from the financial institution to bring the loan back into the appropriate LVR territory. This means that investors will be required to top up the loan or risk losing their investment and capital.
Another option is to borrow money to purchase a property. You will not receive a margin call and banks are generally prepared to lend more against the value of a property. (link to our blog: is property investment for you? chances are yes)
Purchasing an investment property to avoid poverty in retirement
When you purchase a property as an investment, you will rent the property. This rent is considered income. Whilst this will rarely be enough to cover the loan repayments and all other costs associated with the property, it is possible to purchase a property that will attract other benefits by way of tax credits in order to counteract out of pocket expenses.
If the property is new, you can depreciate the asset. If you buy a new car it loses value as you drive it out of the car yard. Just like cars, buildings and chattels depreciate while land (mostly) appreciates. If you have purchased the property to earn an income, the Australia Tax Office allows you to claim this loss in value as a tax deduction.
This means you can depreciate the building and the fixtures and fittings and claim this as a real loss against your taxable income. This should lead to a tax credit.
In most cases, investors will not actualise the tax credit until the end of the financial year, however, it is possible to claim it along the way to help fund the property. A tax variation (or 211D) allows investors to reduce the PAYG payable to account for future claims. An accountant can prepare this at any point in the year, simply crediting you with your benefits over the year by taking less from your weekly, fortnightly or monthly salary. It is a very efficient way to fund a property purchase.
Do not spend a dollar to save 50c.
This strategy is extremely powerful when investing in appreciating assets. It is important to first find a strong investment opportunity that is likely to provide capital growth and accelerate your wealth. The key to this is to hold the property as long as you can, with little effect on your lifestyle.
Property investment advisors in Melbourne
At Eda Property, our specialist property investment advisors have had decades of experience advising clients in saving funds for their retirement. Please contact us if you would like to know whether you qualify for the investment strategies we have outlined above so we can assist you in developing the right strategies to avoid poverty in retirement.
Questions? Feel free to contact a member of our specialist property advisory team at EDA Property. Our property investment specialists have had many years’ combined experience in advising everyday Australian on choosing the best investment property to suit their individual circumstances.