Monday, April 17, 2006 Newsletter April 2006


With “old” now being redefined to mean 80 or 85, the thought of retiring at 60 or 65 is also being redefined.

Already the Australian Bureau of Statistics has reported (in February) that 45% of retirees go back to work for financial reasons, and 36% are going back out of boredom.

This is the direct result of inadequate planning for retirement, as for decades we have not been telling ourselves how inadequate our super is to finance our longer-than-expected lives.

The reason why superannuation and government pensions can’t do the job for us is that – as a product – they were designed years ago on the assumption that we retired at 60 or 65, and died when we were 70 or 75.

But now, two thirds of all men and women who have ever lived past 65 in the entire history of the world are alive today!

This is especially true in Australia. By 2016, baby boomers here aged 65 and over will exceed the total of children under the age of 15!

So something has to give, even if no politician will admit it.

The weight of this massive shift in the demographics of society means that governments can’t afford to pay the pension like they used to, so we have to look after ourselves. Which is why the compulsory superannuation levy was introduced in 1993.

But at 9%, even if you were contributing for 40 years from age 21, you would only accumulate enough to pay yourself and your spouse the pension – i.e. $20,000 pa. That’s just $400 per week.

If you retired today on just $400 per week, what would you have to give up?

You would still buy groceries of course, but maybe you would forego the second car. Perhaps you might decide that you didn’t need to spend as much on clothes, and you could cut entertainment and holidays. Then later on you could trim what you spend on birthdays for the grandchildren, and you could shift to less expensive hobbies. But of course you’d want keep paying your medical insurance, wouldn’t you?

And then of course you would have to ask yourself how long would that purchasing power of $400 last?

The cost of groceries will continue to increase – probably at the rate of inflation – but what about medical insurance premiums? Indications that premiums will continue to escalate, well above the rate of inflation. But as we age, we will increasingly need medical cover.

Our spending budget might get tight, and very quickly.

So if we have to look after ourselves, and today we typically have insufficient super to fund 15-20-25 years of retirement, what can we do?

If the solution is not our super invested in the stock market, then we must look at the alternative – property – as the vehicle to achieve our long term financial security.

The retirement age is already moving out – witness the government’s $25,000 bonus if you keep working until age 70. So fortunately we have time to commence, or add to, an investment portfolio.

So the economics of the issues are that we’ll all be working longer, and then we’ll be receiving less in pension entitlements.

Now this will mean a seismic shift in our understanding of how to finance our retirement years, and during the transition there will be pain – and poverty – for many elderly Australians.

But you can avoid that tragedy – provided you act now!

Eventually, of course, there will be so many elderly voters that the politicians will be forced to alleviate the pain and suffering being experienced by the elderly, but don’t count on it happening any time soon.

Change may be 10,15 or 20 years away, so be prepared to look after yourself.

And particularly put aside adequate reserves to pay for your hospital bills.

You’ll need deep pockets to pay for your (and your spouse’s) hip replacements, your knee operations and to have your cataracts removed.

And you’ll also need another set of deep pockets to pay for your medical bills.

It’s statistically possible that both you and your spouse may need long term medical care due to strokes, heart attacks and dementia.

So you don’t have any time to waste to establish, or expand, your portfolio of residential investment properties, do you?

But where to invest? Read on.


Private clients will know that – as a starting principal - I favour negatively geared residential investment properties in fast growth suburbs near to a major cluster of sustainable jobs, and that my ideal profile of a long stay tenant is a young couple with kids in primary school.

But of course any investment has to be affordable (my definition is that it shouldn’t adversely impact on your lifestyle) – so let’s say your contribution should not exceed $135 per week.

Now major clusters of sustainable jobs are to be found in the industrial suburbs of major cities, so that rules out Far North Queensland and Canberra as some of the better locations.

And I am uncomfortable with Perth and Darwin at the moment, because when the mining boom ends there will be more investment properties looking for tenants than there will be tenants.

Adelaide doesn’t rank highly on the criteria of a major cluster of sustainable jobs (all those new back office jobs for the banking community could one day re-locate to New Zealand – where already the major law firms are now sending their back office jobs) so we’re left with Sydney, Melbourne and Brisbane.

Now Sydney is just too expensive (Australian Financial Group says the average mortgage is $369,000 in NSW) so your contribution – after the tenant plays their role and the taxman becomes your friend – will be well, well in excess of $135 per week.

Which leaves Brisbane (average mortgage $278,000) and Melbourne ($276,000). The outcome of the financial analysis is much the same for both because the Stamp Duty savings in Victoria offsets the marginally higher rentals achievable in Brisbane.

So now for the “best” locations in both cities. Remember we are looking for properties in fast growth suburbs near to a major cluster of sustainable jobs.

In Melbourne, there are two zones where they are making fields into suburbs (which attracts a constant stream of first home buyers as the cost of house and land packages is cheaper) close to a major cluster of sustainable jobs. In these zones there is always buying pressure from young couples with kids in primary school, and jobs are nearby.

These two areas are in a strip from Point Cook to Geelong (there are lots of sustainable jobs in the western suburbs) and ditto in a strip from Frankston to Pakenham (those local jobs are nearby in the greater Dandenong economic zone).

In Brisbane, the same theory applies in that cluster of suburbs around Browns Plains.

Jobs are to the north-west of Browns Plains, and the two transport corridors are north along the Gateway Arterial and west to Ipswich along the Logan Motorway.

Well, there you have it – what the problem is, and an introduction to the solution.

Let me know if I you would like my assistance for you to achieve the full solution as a professional investor – and in the quickest possible timeframe.

Anyone can go out and become a landlord. Visit any real estate agent.

But what I offer is well beyond that. I offer:

1. a long term commitment to relationships
2. Unique properties
3. expertise - funding, legal, accountancy, quantity surveyors
4. concern for your cash flow
5. and the benefits of my professional career – I’m 61.

Until next time

Bernard Kelly 0414 778 518

P.S. For completeness, the AFG says the average mortgage in Perth is $305,000 and Adelaide $211,000.