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Are you financially ready for retirement?

For some of you reading this article, retirement will be a distant speck on the horizon – a far-off notion that you may have given little thought to.

For others however, it will be looming as a not-too-far-off reality that you might wish you’d considered sooner.

Regardless of where you are in life right now, retirement is something you need to plan for (and dream of) to make the most of your so-called ‘golden years’.

The first thing every property investor should think about, in order to feel confident about your financial security in retirement, is an exit strategy. This is something you should have in mind before you even buy an investment.

However, a lot of people overlook this element of their planning, which is a little like going on a long drive and not checking how much petrol you’ve got, meaning you’ll never be sure whether you can actually make it to your destination.

Know where you’re heading

Let’s face it; adopting an investment strategy without first thinking, ‘Is this actually going to achieve my goals completely?’ makes very little sense.

In failing to consider this question, some people grossly underestimate how much they need to invest and some wildly overestimate. Obviously investing too little will ensure failure, while investing more than you need to and taking a larger risk is pointless. That’s why developing a retirement plan before you begin is critical.

Now, the perfect investment vehicle would deliver massive amounts of capital growth while you’re working and provide heaps of income when you retire. The reason I say that is because while you’re working you don’t necessarily need extra income.

In fact, extra income gives you an extra tax liability, so if you can get most of your return in capital growth and reinvest that pre-tax return each year so it snowballs, you’ll be far better off.

Income is what you need

However, when you retire and your employment income disappears, capital growth isn’t necessarily going to pay the bills. In this instance, you want your assets to be generating lots of income.

That’s where a good retirement strategy comes into play, because it can potentially turn a capital growth asset into a veritable cash cow in retirement.

While positive cash-flow properties may actually deliver the required mode of income to fund retirement living expenses, that outcome is dependent on when you start a positive cash-flow strategy and how the PCF portfolio has performed.

Therefore, even though retirement planning is more important for capital growth strategies, the positive cash-flow investor should still make allowances for how they intend to achieve their retirement goals.

Your time line

The obvious first step in building a retirement strategy is to determine how much post-working income you need. Once you have a figure in mind you then need to calculate your financial protections to get an idea of what you can actually achieve.

If you start investing today with the aim of retiring in say, 15 years, but your property portfolio is only going to generate $15,000 worth of net income, you really need to do something as you approach retirement to make that figure more significant.

On the other hand, if you’re going to retire in 30 years, at which stage your property portfolio will produce a net income of $100,000, which is enough for you to live on, clearly you don’t need to do anything different.

To guarantee you can meet your income goals when you cease full-time employment, your retirement strategy should be assessed alongside an evaluation of the best property strategy for your needs.

In other words, when you analyse whether a capital growth or positive cash-flow route makes the most financial sense for you, consider your retirement strategy to make the best decision on which investment approach to follow.

Too far to see

Of course, the eternal issue with any type of financial planning is that you can generally plan quite accurately for the next one or two years, but beyond that it starts to get very rubbery and difficult.

So much can change in 10, 20 or 30 years. The world can change, your personal situation can change, tax legislation can change, and so forth. These things all suddenly become variables that can throw even our best-laid plans into disarray.

I think that’s probably why many people never bother to think that far ahead, even when considering investing in property.

But regardless of the curve balls, you must sit down and come up with a retirement strategy. Sure there are no guarantees that it will all work the way you envisage, but that just means you should have a couple of different options up your sleeve.

At least then you know if Plan A doesn’t pan out, there’s always Plan B and perhaps even a Plan C.

If you aim at nothing that’s exactly what you’ll achieve!

Developing a retirement strategy is really about accounting for possible scenarios and keeping the variables in mind.

For this reason, there’s no point going into too much detail and sweating over every little second of your future, but you need to know broadly that you have maybe three different options (and the possible outcomes) when you retire.

Of course, if you have only a 10 or 15-year investment window of opportunity before you exit the paid workforce for good, it’s even more critical to think about retirement strategies.

Think long term

The other benefit of working out your retirement strategy in advance is that it forces you to think about different ownership structures and how the decisions you make today will affect you tomorrow.

Most people immediately assume when they buy that first investment property, the most taxation benefits will be had if the property is bought in the name of the highest income earner.

However, if they projected the potential financial gains of holding that investment further, say 20 or 30 years when the property is producing strong positive cash flow, they would realise their investment income is going to trigger a significant tax bill – right at the point you really don’t want one!

Of course, if you put that property in a discretionary trust, while it might not be beneficial for the first five years or so because the gearing benefits are trapped inside the trust, in year 30 it’s going to be really effective in providing low tax or no tax income.

Future seems clearer

The other benefit to drawing up a retirement strategy is that once you have an end plan, the entire journey seems more achievable.

When you have a very clear idea of the fact that you will use X investment strategy, which is going to give you Y amount of capital growth, which in turn means you need to do Z when you retire to give you XYZ amount of income, you will have a concise picture as to how each step links in to help you retire and enjoy the lifestyle you want.

By taking that extra step and determining how what you do today and the sacrifices you make in the short term will enable you to reap those financial and personal rewards when you retire, you’ll be far more motivated to follow through and act on your plans.

Portfolio structuring is one of the areas we specialise in here at Property Tycoon Finance.

So if you would like more information on how you can profit from investing in Australia’s residential real estate sector by establishing clear investment strategies and structures, contact us or subscribe to receive regular post updates and industry insights.

Stuart Wemyss is a chartered accountant and founder of Property Tycoon Finance. Email: wealth@propertytycoonfinance.com.au

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