RETIREMENT STRATEGIES 1 February 2010

Investment property - south west suburbs of Brisbane - awaiting its first tenants (right)

KEVIN RUDD: “WORK LONGER, EXPECT LESS”

Kevin Rudd’s Australia Day message was basically “Expect to Work Longer, and Expect Less from the Government”.

The background to this message is that the federal government is now spending $36 billion annually on tax breaks to encourage us to invest in super, while simultaneously spending $31 billion on welfare payments (including the age pension).

The government knows that it has to stop the accelerating growth in both expenditures, and it’s a good time – politically – to act now as we are all quickly realising that we’ll have to work longer to boost our saving to enable us to have 20-25 years of comfortable retirement.

Consequently that tax event (which is what superannuation is in Australia) will soon be less attractive, and so arguments to boost your portfolio of residential investment properties (using the very successful strategy that I use with my private clients) are ever more appealing.

THE BEST STRATEGY – IN A NUTSHELL

The recent BIS Shrapnel report - Residential Property Prospects, 2009-2012 - suggests the Sydney and Brisbane markets are the places to for the next few years.


Of course that macro style of analysis ignores consideration of the ideal tenant (a young couple with kids in primary school) or what product they want (a brand new four bedroom family home, air conditioned, double garage, with a yard front and back).


And when I overlay the BIS Shrapnel report with my own investment analysis of the 35+ investment markets across Australia, and focus on “least in, most out”, my conclusion continues to be that Brisbane is more affordable, growth in the south west suburbs is forecast to be fastest (and there are major economic zones there – where there are stable jobs) rents in Brisbane are relatively higher, and land tax is the lowest.


And a family home avoids any involvement with body corporate and sinking fund fees, and allows you to exit into the biggest possible market i.e. home owners. And a brand new house gives stamp duty savings and maximum depreciation.


Which is why the strategy that I share with my private clients uses an off-the-plan family home in the southwest suburbs of Brisbane.


This strategy has been very successful in the past, and I am convinced that it will remain so for the foreseeable future.


WHY MOST OF US WILL STRUGGLE IN RETIREMENT

The fundamental reason why most of us will struggle financially during our 25 years of retirement is that no-one ever taught us about personal finance!

The educational system never taught us how to plan for our families or our futures, and post-education, the daily journalists don’t focus on it either.

We don't know what to write a “business plan” to make our lifetime dreams a reality. The government has taken a big brother approach via compulsory superannuation, however as that is inadequate, the bottom line is we must plan our own long term financial affairs carefully, with as much attention to detail as we put into planning a four week family holiday.

Most of us are unable to plan like this and that is precisely why most people don't achieve financial independence.

However the most important thing to understand is that YOU are responsible for your financial future.

And the best time to start? ... the best time is RIGHT NOW!

SHOULD YOU USE A SMSF?


As I’m a retirement strategist (and not a financial planner, or accountant, or solicitor who would generate fees from selling Self Managed Super Funds) I think that I have some degree of impartiality when I’m asked “should we buy an investment property in a SMSF?”

As a generalisation, I think that SMSFs do have a place if you have a substantial share portfolio, as you then have the flexibility to adjust your holdings as circumstances changes, and you won’t have exposure to excessive management fees.

However, as property is a buy-and-hold asset, this fundamental benefit of the flexibility provided by a SMSF doesn’t have relevance to your portfolio of investment properties.

And as most SMSFs are managed for growth, they generally don’t earn enough in dividends to be able to take advantage of the tax benefits available when you personally use a negative gearing strategy.

Of course there are other issues with SMSFs – such as the annual administration costs and then the strange mortgage products (known as “instalment warrants”) that banks are slowly developing for this method of ownership.

And the rules are that banks can only rely on the financed asset inside a super fund for their security. So they generally give conditional approval - subject to 100% valuation on completion – but as new homes rarely, if ever, come in at 100%, the vast majority of new property transactions that financial planners, accountants and lawyers try to put inside SMSFs don’t proceed.

To summarise - If you’re in your 50s, and are short on what you’ll need for 25 years of comfortable retirement, the only way to catch up is to use negative gearing, with ownership in personal names, and you should use your tax credits (that you get back every payday) to assist with your funding.

So ignore any attempts to sell you on the benefits of a SMSF.


HOST AN AT-WORK SEMINAR

You probably know many people who need my experience and expertise right now.

Here’s the deal – you invite a few people to a lunch or after-work seminar, and I’ll present Retirement Strategies for Employees.

I’ll pay you $150 for your expenses, and a further $1000 for every participant who has me share an investment property with them.

About Bernard Kelly:

Bernard Kelly BEcon MBA CRPC Australia’s Retirement Strategist, is a highly sought-after advisor, retirement authority, thought-leader, author and radio commentator because he makes the complicated and mundane topics of investing and retirement fun! Bernard has over 20 years experience providing families with financial thought. He is the author of Live Your Dreams in Retirement, Property Investing for Couples, Goolwa by Breakfast and Raising Decent Kids into Substantial Wealth and publishes a fortnightly newsletter that reaches thousands of subscribers worldwide.

19 Prospect Street, Box Hill 3128 Australia. Tel 61-3-9899 8577 mobile 0414 778 518