The problem with using property to fund retirement

If your next-door neighbour insists his single rental property will be his golden ticket to retirement, it might be best not to take financial advice from him. Sure, he might be a high-income earner with a nice home and fancy things, but using one or two average rental properties to fully fund retirement is a risky game for several reasons.

At First Financial, we specialise in helping clients build enough wealth to support their ideal lifestyle from retirement through the rest of their lives. We know life moves fast, and it’s easy to hear what others are doing and assume their plan will work for you. Many people believe income from a rental property will be enough, only to discover it’s not. Here’s what you need to know.

Property investment has a tangible nature that people are easily drawn to. Unlike shares or other financial products, property can be seen, and it gives the investor a sense of control and security over their asset. In Australia, we also have a culturally ingrained attitude towards property ownership as a measure of success and financial stability.

It’s little wonder that we view property in this way. Generally speaking, property values do appreciate over the years, despite occasional downward fluctuations. Potential investors find government incentives like negative gearing and capital gains tax discounts appealing, and current population growth and urbanisation are continually driving values upward.

The expectation of steady income from rental properties is understandable but often misleading. Having long-term tenants, rising rental rates and the current state of minimal vacancies can certainly make the passive income generated by a rental property seem stable and consistent. However, this focus is on gross rental yields and doesn’t factor in the ongoing expenses.

Failing to account for those ongoing expenses, such as council rates, land tax, insurance and repairs and maintenance is the main reason that relying on one or two average rental properties for income in retirement may be insufficient. These expenses can really add up and eat into the profits. Additionally, rental income is not guaranteed income.

The impact on cashflow is significant because it’s the number one thing you need for retirement – that’s what you’re going to be living off. And with the cost of living consistently rising, the problem only gets worse. Should your rental income remain stagnant while expenses keep climbing, that will shrink what’s left for you to spend on enjoying your golden years.

Your ideal retirement lifestyle will dictate whether an investment property income is sufficient. To figure out what you need to be earning to support yourself, consider things like travel dreams, dining out, engaging in hobbies or providing financial assistance to family members. Can your rental income realistically sustain this? And if an unexpected life event happens, property isn’t the most liquid asset to cover those costs.

When rental income falls short, the rest of your retirement assets have to do the heavy lifting. That means relying more on superannuation, savings and other investments to cover daily living and lifestyle expenses. Tapping into investments meant for long-term growth or inheritance will likely derail future plans and limit your options.

Depleting your superannuation ahead of schedule can leave you short, especially with people living longer than ever. Putting pressure on your savings account also means less funds are available for discretionary spending. And if you’re forced to cash out shares too early, you’re not just losing that asset. You’re missing out on long-term growth and the power of compounding.

After a lifetime of hard work and building wealth, the last thing you want in retirement is financial stress. Relying too heavily on one or two average investment properties without proper diversification can, unfortunately, lead you there.

For the best retirement plan, we recommend seeking personalised, professional advice. At First Financial, we take the time to understand each client’s goals and dreams for this stage of life and what it will look like for them and their families. We assess their financial position in detail and map out the best pathway to achieve those goals.

Life changes, markets fluctuate, and your financial plan needs to keep up. Regular reviews are essential to make sure your strategy stays aligned with where you are now and where you want to be in the future.

Property can still be an extremely beneficial part of your portfolio and overall investment strategy, but it works best when combined with other options to ensure you’ll produce the income you need to enjoy retirement.

What often happens when relying on one or two investment properties for retirement is that people eventually reach a point where they decide to sell them and reinvest in more liquid assets that offer higher income and don’t come with the same ongoing expenses.

At First Financial, we help clients make smart, informed investment decisions that support goals and build long-term financial security.

To learn more about property, investment strategies and personalised retirement planning, contact a friendly member of our team today.

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