Transitional Planning for Boomers

Readers of MacroBusiness have turned my attention to a recent “AskNoel” question on Domain from 2 (early) baby boomer investors.

Q. I’m 48 and my husband is 55. As a result of renovations blowing out to $300,000, our mortgage is $690,000.
 Our home is worth $1.1 million. We have two positively geared investment properties, owing $280,000 and $525,000, with about $100,000 equity in each.
Our incomes are $95,000 and $76,000 and we have $200,000 each in super. Should we sell one rental property and pay some off our mortgage or buy another investment property to minimise tax?

With my previous experience in the financial planning industry I’m not surprised at this situation and the low financial education of the couple involved.

Noel Whittakers slightly contradictory response rightly pointed out that this couple, with net assets of just over a million dollars (see table below), have relatively low tax rates, with the husband near to retirement/preservation age.

And yet they are considering buying another investment property to minimise tax?

Assumed current portfolio

Transition Strategies
This transition of wealth accumulation to wealth preservation in retirement is a tricky situation for this nation’s baby boomers. As The Unconventional Economist has pointed out, it is this demographic that is most likely to own 1 or 2 investment properties – with relatively modest LVR’s but usually negatively geared (I question if this couple really are positively geared: the interest on their IP mortgages alone is $63,000 or so: on an average 4% gross rental yield, the rent would only be $40,000…..) and a high concentration of their paper wealth in their home with minimal superannuation.

So as a group, they are moving from a high taxable income with a leveraged concentrated portfolio to zero/low tax lower income with assets that only work if tax-advantaged. Negative gearing makes no sense (nonsense?) if your marginal tax rate is zero.

Risk is Risk
It appears that this couples financial plan rests almost solely on having $2 million worth of property for retirement – with a paltry $400K in super.

So what should this couple do? Keep the IP’s and stay the course? Sell one and pay off some of the mortgage? Buy another property? Salary sacrifice into superannuation? Or something different entirely?

Financial planning is not about getting the best mathematical result – its about weighing up the risks and considering opportunities whilst providing a robust forecast of what could happen. Simply saying “Strategy A will give you the best tax outcome so I advise this” is foolish advice at best.

Let’s look at the options from a risk/robust/opportunity point of view:

Keep the IP and Stay the Course
Residential property is likely the most riskiest asset class in this country. Some say it will double every 10 years, as it has in the last 25 years, or “average” 7% a year along a nice bell curve. Suffice to say this blog has analysed and considered the continuation of this paradigm and consider it over. This time is not different.

By choosing this route, this couple – and the 1.7 million other property investors out there – are exposing themselves to probable reductions in their paper equity and cool words from their bank manager due to their increasing LVR. A 20% decline in valuations would increase this couple’s global LVR from 71% to 88%. That’s LMI/FHB territory.

Rents aren’t going to experience any massive jumps in the years ahead. There is no shortage of properties to rent, and rents move along at a similar pace to CPI (approx. 3-4% pa).

Moving from property to super, this couple has nowhere near enough to fund their retirement. Assuming they both aren’t salary sacrificing much into super (and how can they whilst servicing a $690,000 mortgage on a $170,000 pre-tax income – approx. $60K a year in payments doesn’t leave a lot for expenses) their likely super balance will be in the range of $700K at retirement, providing a tax free pension of about $30K a year (equivalent to $40K in pre-tax earnings).

Not exactly a comfortable retirement – remember by then, their mortgage is likely to be reduced to approx. $480-600K (depending on when they retire) – yet the repayments won’t have changed, still some $60,000 a year – assuming interest rates don’t rise or one of them doesn’t lose their job.

Forget about it. This strategy is a losing one – unfortunately it will be the majority who cling to it in the years ahead.

Buy another IP
Take on more debt just to reduce tax on income that is just about to become tax-advantaged, whilst leaving a whopping great big mortgage on the family home? Read above again, slowly.

Pay off the Mortgage
Now we are talking some sense. Consumers forget that the headline interest rate on your mortgage is post-tax. That means it takes on average, an extra 30-40c of every dollar of your wage to pay off your mortgage (and most of this is interest, so its actually a multiple of that again to pay off principal)- so the effective interest rate is really closer to 11 or 12%.

An 11% pre-tax return is fairly good in an inflationary environment or where your real earnings are increasing. Consider that the average super fund annual return for the last 10 years barely exceeds 4% (post-tax, so roughly 4.5% pre-tax).

Jan 2011 APRA Super findings - best average is 4.2% with 10% annual volatility


So you have to ask yourself – is it better putting your post- or pre-tax dollars into super and earn 4 to 4.5% or pay off your mortgage and earn almost double and leave yourself with a better income position that is robust to any unforeseeable change?

The caveat to this strategy are those with a DIY fund who can access a 7% term deposit (or who invest in an absolute return fund manager) and can salary sacrifice meaningful amounts into super (in this case 85 cents of each dollar of income is invested, whereas its only 65-70 cents of every dollar paying down your mortgage).

This strategy is appropriate with someone on a high wage (at least 37% marginal tax rate) and with a modest mortgage (i.e repayments are equivalent to paying rent, so its not a lost opportunity cost).

Salary sacrifice/contribute to Super
Debates about fund manager fees aside, there are two very large risks with superannuation. The regulatory/legislative risk exposes those saving for retirement to constant changing of rules and the possibility of increased tax and/or allocation or even access restrictions. The lack of risk-adjusted returns for most funds, that exceed the nominal cash rate or inflation completes this pair of nasty truths (see chart above again)

For this couple contributing to super the entire CGT-adjusted equity realised in selling one or even two or their IP’s still leaves them with a very large mortgage. It may also run them foul of “over-contributing” – yes, you can get penalised for trying to save for your retirement with some very punitive tax rates.

To help increase returns in super, the best way to get out of the industry and retail fund poor performance (and in some ways to be more flexible around ridiculous constant tinkering with super regulation) is to start a Self Managed Super Fund. Contrary to popular belief, you don’t need $200K and it doesn’t cost the earth to set up and maintain. There are some risks and administration problems but this is what comes with being responsible for your own money and future.

One of the best strategies is to go to the bank and plonk most of your super into a high returning (7% plus) medium term deposit. Immediately you are now exceeding the average return of almost all super funds (except those run by The Prince – shameless spruik). Although a “Great Inflation” may be on the way, or even here already, the consensus is towards higher interest rates to tackle inflation. We are clearly at a macroeconomic inflection point where higher rates that pay more on your cash earning you a greater return, will devalue, deflate and possibly depress asset prices of shares and property.

A better way
For this couple, it is obvious they don’t need any further tax advantages at the expense of increased exposure to risky and overvalued assets – they need income and they need to pay down their debt. The holding costs of the IP’s versus their “return” are far too risky: better to sell BOTH properties while they still can and use half of their after-CGT equity to pay down their mortgage and half to contribute into super. (Using an average 33% tax rate and the 50% CGT discount the $200,000 in paper equity would realise $167,000 after tax, more if the super is contributed concessionally). Although they give up future rental income – a proper opportunity cost to be sure – this is offset by the reduced risk and the ability to earn better returns in other assets.

Next, the husband should start a Transition to Retirement Pension (TTRP), thus increasing his super returns by 15% at a stroke (there’s no tax on earnings in the pension phase). This strategy has you salary sacrificing most of your income down to the same tax rate payable in super (15%) whilst drawing a tax-free pension to make up the post-tax income shortfall. It also means no additional funds placed into super (net), so they can concentrate on paying down their mortgage before retirement.

Lastly, they both need to tactically re-allocate their super balances out of what is probably the default “balanced” option into the cash option – for their age, at least 70%. The remaining should be a mix of equities, preferably international, with some exposure (if possible) to physical gold and other forms of insurance (life/TPD/income protection).

Proposed rebalanced portfolio

This is a more robust portfolio for this young Baby Boomer couple and gives them the flexibility to weather any storms, or take advantage of opportunities ahead.

Summary
Baby Boomers close to or considering retirement had better get their act together. The risks of relying upon continued asset values in property to remain high will leave many exposed if the situation worsens and Australia ends up turning Irish, American or Spanish.

Disclosure: The author is a Director of a private investment company (Empire Investing Pty Ltd), which has no interest in any business mentioned in this article. The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Latest posts by Chris Becker (see all)

Comments

  1. Managing tax, and repaying debt is certainly the way to go. Start a TTR yes do it now. Look at selling off an IP and reduce debt, consider using a gain on the property to subsidise a salary sacrifice amount… for the next 2 years, then reset the TTR to increase the annual pension payment??
    or just wait till you are about to pull stumps and then gett he gov’t hand out of $26,000 pension every year
    Disclaimer – I have know idea toss your own coin etc etc etc, all love no responsibilty etc etc etc

  2. Prince – a great read!

    As for the spruiking wrapped in some good solid advice – never hold back!

    The part that’s frustrating is when people ask for advice, you go through the steps, suggest to them they need to cut the umbilical cord to their IP (where necessary) – and they just look at you in sheer horror. The brainwashing is so powerful. To offload IPs is viewed by society as failure.

    Furthermore, telling friends there’s a storm heading our way and to suggest they physically hold some precious metals and cash is viewed by some as being an alarmist.

    There’s a lot of hurt heading our way, and a significant number of people functioning in a catatonic state are about to be slammed by a freight train.

  3. An interesting article, Prince (shameless spruiks notwithstanding) 🙂

    When you read the initial question from the BBs quickly, the first impression is of quite significant wealth – until you see it all laid out in your first table. All of a sudden, these people look very vulnerable – potentially declining property values, rising interest rates, possible unemployment and/or ill-health all lurk in the shadows.
    Given their ages, they still have some working years ahead of them, assuming their employment is safe. And looking at your “rebalanced portfolio” I’d say they’re going to need every one of those years.
    The scary bit, in your first table,is that while the $1.495m liability is set in concrete, the bulk of the $2.505m is very much in the “what my property is worth” category. My experience is that many people have a somewhat inflated opinion of what their property is worth, and the actual number is a moving target anyway (not necessarily in a particularly nice direction at the moment).
    Even with your rebalanced portfolio, they still have $605k hanging over their heads – that’s a lot of hoot to find when you might only have ten years max worth of work left in you.
    And I concur wholeheartedly with your comments about SMSF – for reasons which I imagine are less than altruistic, the professional super industry has portrayed the establishment and running of a SMSF as something akin to brain surgery. Figures in the many thousands are bandied around as annual running costs, and one could be forgiven for thinking that a degree in economics is necessary in order to be your own trustee.
    Nothing could be further from the truth – a good accountant and auditor will handle the paperwork for a SMSF for a fraction of the equivalent management fees in a retail fund, and the compliance duties of the trustee are simple and common-sense. There’s also the added satisfaction of managing your own affairs and making your own investment decisions. As well as the very comforting knowledge that you have control over, and direct access to, your retirement savings, and do not have to jump through somebody else’s hoops in order to access it (legally, of course).
    I would suggest that your summary is pertinent even if Australia doesn’t become Irish, American or Spanish.
    In retirement, liquidity is everything.

  4. Next, the husband should start a Transition to Retirement Pension (TTRP), thus increasing his super returns by 15% at a stroke (there’s no tax on earnings in the pension phase). This strategy has you salary sacrificing most of your income down to the same tax rate payable in super (15%) whilst drawing a tax-free pension to make up the post-tax income shortfall.

    I don’t understand how this provides a benefit given there is a cap on how much you can place in super before it gets taxed at high rates?

    • the tax rate on earning of super is 15% unless you are in “pension phase” which means your tax rate is 0% … therefore starting a pension reduces the tax (increases the earnings/performance of the fund)
      the problem is that if you are not contributing enough back into super you are reducing your accumulated retirement benefit by the pension drawrings each year…. and the problem is getting money back into super … restrictions set by govt.

    • Hi Russell
      As no one has answered your question I thought I would!!! He could salary sacrifice up to $50,000 per annum as a concessional contribution.(he is over 50) This concessional amount is made up of all super guarantee payments + TTR pension (10% of super balance in an allocated pension) and salary sacrifice. He could not sacrifice down to the 15% limit as this would go over the cap as you have pointed out. You would be crazy and the tax penalty is 93% on excess. He would benefit enormously through a TTR up to the limits though, paying less taxation and greatly boost his retirement savings.

      • 93% tax applies only when you exceed both the Concessional Cap and the Non Concessional Cap. Exceeded the concessional will see you paying an additional 31.5% on top of the 15% contributions tax. just to clarify 😉

  5. Sandgroper Sceptic

    Prince this is good enough for University courses on Financial Planning!

    No quibbles with your analysis it is pretty rock solid. Sell IPs now, cycle Super money through a TTR pension, gain tax advantage of 15% whilst doing so and pay off mortgage boost super with whatever is still coming in. If the investment properties price realisation is a bit rubbery it makes the figures look much worse and supports your sensible advice. Ideally Boomers should be retiring with no debt, own their home outright and have a good sized super account. What proportion of the Boomers are in that position? Not many from what I have seen…This adds to the demographic selling wave that threatens to engulf all property owners as Boomers clear out their monopoly collection.

    You can run your SMSF for less than $1000, so a balance of $100k would still be ok on a percentage basis. It is not that hard especially if you are simply investing 90% of the SMSF balance in term deposits. I totally concur on life insurance and an allocation to physical gold in a safety deposit box as a nice wealth preserver.

  6. All the noise and fury about the merits of property investing over the years, and this example – surely a poster child for this strategy – yields a net worth of $980k?

    Fantastic post Prince, thanks for pulling back the curtain.

    • I don’t think anyone is arguing about the effectiveness of investing in property over the last 20 years – the argument is more about how that strategy will work over the next 20.

    • And to boot, they will have paid far more than 980k in mortgage interest over their lifetimes

  7. Prince,

    Great article.
    Prince said “Baby Boomers close to or considering retirement had better get their act together. The risks of relying upon continued asset values in property to remain high will leave many exposed if the situation worsens and Australia ends up turning Irish, American or Spanish”

    The sad thing is in a few years time there will be so many boomers that will lose it all through stupidity, arragance or stubborness or all the above to acknowledge the market is crashing.

    Cheers,
    LBS

    • Leith the issue is that commonsence is not very common.
      I actually don’t feel sad for the sheep who bought because everyone else is doing it, and live beyond their means. I feel annoyed that vested interests would have people waste $ on building a portfolio that is going to be difficult to make their retirement comfortable in a non tax advantadged enviroment.

      the renovations in the example that blew out by $300k … obviously no planning at all went into the project or they have been taken for a ride by every contractor in the process.

      • What amazes me is that a 300k reno is the last thing they can afford!!! Clearly they don’t realise their true financial situation.

  8. there is something striking here, it seems that most of people didn’t succeed in PI even during boom times.

    it is likely that these people are paying mortgages for 20 years – around 30% of their pre tax wage; today, their total equity wealth is only $600k – all this after the biggest property boom in our history.

    if they just paid off their first PPOR bought 2 years ago they would have $600k in equity right now. If they put the rest of money they spend on mortgages in simple TD they would probably have few extra $100k by now.

    If prices fall 20% their investment LVR will be 94% (likely zero or negative because I doubt the price they said it is worth now). That is not the end: they will be left with FHB type of mortgage (LVR~80%) for their PPOR in their 50s. With rising costs, budget problems … their ability to retire in next 20 years is very slim

    • correction:

      if they just paid off their first PPOR bought 20 years ago they would have $600k in equity right now. If they put the rest of money they spend on mortgages in simple TD they would probably have few extra $100k by now.

  9. Thanks for the kind comments folks – when I was in the FP industry, I saw many examples like this one – its not out of the ordinary at all.

    Trying to explain the concept of “robustness” and “liquidity” for people who weren’t considering retiring for at least 5 years was very hard.

    SMSF are truly great vehicles, but they come with admin/regulatory hassles (typical of government overreach). I don’t believe in the “$200K minimum balance” baloney either – you can run a SMSF for $50K up, no problem.

    I haven’t got the stats on me at the moment, but you would be shocked at how many 50-55 year olds still have massive mortgages on their PPOR – I actually think the Boomers won’t start retiring at age 60 or 65 – they WILL HAVE TO work until their 70’s to pay off the mortgage.

    The recent reduction in concessional caps was brutal for this cohort – from $50K to $25K.

    • Yep, I have no debt, aged 59 and am happily pumping the full $50k into my super fund since returning to Oz in 07, and my understanding is that I can do that for one more tax year then it reverts to $25k. With only 6 years left in the workforce that reduction will have a significant effect on the final balance which is a little over $200k at this point. I think the decision to end that concession of $50k was extremely short sighted given that many people in my age bracket simply do not have enough super in place yet. Perhaps the government assumes we all have investment properties to sell?
      I’m hoping there will be a rethink on this before the concession ends.
      Incidentally I will not be reliant on super for an income stream…

      • Hi Russell
        GOOD NEWS FOR YOU

        As per the federal budget!!! The Govt has kept the $50k cap in place for the over 50’s. The only stipulation will be it is only in place for the balances of under $500k. I’m sure that this will be a relief for yourself and at least it is one thing that the govt got right to help people such as yourself.

      • Russell,

        Romish is correct, the plan is reversion to $25k if the balance is less than $500k.

        Are you married? if so, the best way to alleviate ever going towards this $500k balance is to make your contribution first, then split it with your spouse.

  10. “Residential property is likely the most riskiest asset class in this country. ”

    Prince, full respect to your judgement, but this sounds like quite a call to make against the least volatile asset class and virtually only one that owners can directly influence the value and returns.

    I (an amateur) would have totally agreed this couple’s strategy is very risky, but because they are investing in IP for growth, not for income.

    Are you basing this view solely on the current situation of inflated prices, or is this is more general view? In this case if the couple HAD paid down their home mortgage, surely you would recommend they hold their IP?

    • Good question Ben, thank you.

      Risk is not volatility. The share price of Woolworths can go up and down over 2% a day, or up to 10% a month, but its not a risky investment. (well at current prices it definitely isnt).

      Risk is the probability of losing money, either through the lack of returns (i.e income/growth) or the lack of THE RETURN of your original capital.

      The higher the probability – e.g heightened by purchasing at the highest point in an investment cycle – the higher the risk.

      “least volatile” does not equal “least risk”. This is one of the premium, central fallacies of modern financial theory.

      Shares were extremely low volatility from 2004 to 2007 – and then they weren’t. Its the Minksian investment cycle, where stability – low volatility – begets instability – a bubble/sell-off etc.

      My general view is found here – http://www.empireinvesting.com.au/how-we-invest/

      If the couple had paid down the home mortgage to zero, no I would still advise selling at least one of their IPs. The returns are not good enough to weigh the risk of stagnant growth and exposure to leverage.

      They would have been better off salary sacrificing into super and allocating the funds into high interest term deposits. To offset the risk with cash (inflation/confiscation) I further recommended the use of 2-5% of physical gold, and placing such funds in a SMSF – definitely not a corporate, retail or industry super fund.

      I’m not against property as an investment – but it should be done as such. An investment – not speculation. When you REQUIRE capital gains in property to get a return, that is speculation, not investment. I’m also not against leverage – but not at 80% plus LVR. 50% or less is more appropriate – for anything, including stocks.

      Thanks again for your comment Ben, I appreciate it.

  11. Debt is real, equity is opinion and income is all, especially post retirement.

    Noice, Prince, very noice to flesh out the framing of the strategies, maximising income whilst reducing risk, in the most cost effective manner.

    Cash poor, asset poor and debt rich is no way to be prepared for a constantly changing political, economic and financial environment. This is a formula for heart attacks.

    Working till you’re in your seventies to have the beach house, that could easily turn out to be a weekender-permanently.

  12. Good analysis – I am in the FP industry. I know these clients as dog food millionaires. Net assets over 1 million, but cash poor. This is very common and in fact there are a lot of people in 70 to 80 age bracket that have their property but nothing else. It will be interesting to see how the reverse mortgage market works with these people. I can see a big demand for low cost property which may actually act as floor to the property market.

  13. Lighter Fluid

    Hahaha! “Retirement/preservation age”

    I’ve got an image of boomers sitting around in jars of formaldehyde!

    The article was good too.

    Thanks Prince!

  14. Man,

    I don’t think your advice here is correct.

    The guy is aged 55, he can’t draw a tax free pension via a TTR rules prior to age 60.

    He will still have to pay his marginal tax rate, less a 15% rebate on the taxable component for any pension drawn.

    Most people have close to 100% taxable components in their super.

    The 15% rebate also tends to be offset equally by the same amount being salary sacfriced into super.

    TTR doesn’t tend to work for people less than 60. It’s a zero sum game for the most part in terms of affect to taxable income.

    What we do have is a (approx) $200,000 sum in a zero tax income and trading environment.

    Assume 5.5% income on this, therefore $11k a year income.

    At 15%in accumulation phase, to 0% in pension phase, the saving here is about $1,650 a year.

    Most of that will be swallowed up in the first year by implementation fees.

      • I didn’t say he couldnt’ access it.

        Preservation age, I mknow, is 55.

        I said that prior to age 60, TTR pensions are taxed on the taxable component.

        I believe the tax rate is the beneficiaries marginal tax rate, less a 15% rebate.

        • Yep, that’s my understanding when I read the ATO info yesterday after reading Princes post…as a 59 year old I can’t see how a TTR pension provides me with any tangible benefit in terms of tax reduction, but after I turn 60 next year…then obviously something to re examine.

          • By moving into pension phase, the tax on earnings reduces to zero, compared to 15% in accumulation phase. There’s your savings.

            Also, the portion of your super that is made up of tax free components comes out tax free as income payments. Eg if your super of $200k is 100k taxable and 100k tax free components and you draw a pension of 10k, 5k will not be taxable, the other 5k will be taxable with a 15% tax offset.

            Aaron you’re right that the saving just on the reduction in tax on the earnings is minimal, the big kicker comes if you can boost your tax free component (sell the properties and contribute it to super as a non concessional contribution (max $150k, or $450k spread over 3 years). Or cash out some unrestricted non preserved (if you have any) and put it back in

          • Steve,

            Not many people have a sizable tax-free portion within their account. Most contributions are concessional, therefore considered taxable.

            As far as the savings in a tax free environment go, as i pointed out, a realistic benchmark in this scenario is around $1,650 a year. Not really material considering their debt levels.

            Another issue is that financial discipline is required as they are also obliged to take out at least $8,000 a year (4% of balance, I know it is 2% for this financial year).

            I’m aware of the $450,000 non-concessional contributions, but that doesn’t really fix their balance sheet, which is the point of this case-study.

    • The 15% rebate is not equally offset by contributions tax even if the fund is 100% taxable.
      Assume an individual aged between 55-59 with $200,000 in super that is 100% taxable and an $120,000 taxable income (so calcs dont have to take in to account different MTR’s)
      They withdraw $20,000 pay tax of $4,700 (38.5%- 15% rebate)
      This results in and extra $15,300 post tax, $24,878 can be salary sacrificed resulting in reduction of $15,300 post tax income and the same net cash position.
      Salary sacrifice of $24,878 will reduce income tax by $9,578 and result in $3,731 contribution tax.
      Tax saved is $9,578 and tax paid is $8,431 ($4,700 + $3,731). This provides net saving of $1,147 to be added to the $1,650 from difference in tax rate on earnings between super and pension.
      Not an astounding saving but better than nothing. The strategy does use up often precious room under the concessional contribution cap.
      Although both 15% the rebate and the contribution tax apply to different amounts.

  15. Good piece prince. I’m in the FP industry, there are lots of clients in similar situations. Low super, Low cash flow, high debt.
    The BBs who are really sitting pretty now are the ones who:
    – Lived within there means
    – Used Super to full advantage
    – Terminated debt in quickest

    These also seem to be the clients that don’t have car leases, don’t have flashy clothes and have saved the overseas holidays till later in life.

    It’s not flashy advice but ‘spending less that you earn and investing the rest’ goes a long way over time.

    My personal observations only.

    • rich I concur.

      It’s something that Gen Y should learn, although you could argue that for the most part the BBs did not set a good example.

      As others have mentioned it is very common to see people with very high incomes having next to no actual savings due to their massive debts. They use all their incomes to leverage up without understanding that leverage work both ways – when things go bad, they go really bad!

      And when you mention the obvious – why don’t you just spend less than you earn and invest the rest, they get defensive. Taking on debt for property is the path to riches, don’t I know that?

      • You touched on it, Gen Y’s parents did not set a good example. We have seen our parent’s wealth grow exponentially over the last 20 years and want to live that lifestyle. Combined with banks who are throwing themselves at Gen Y to get into as much debt as possible, no wonder there’s the problems.

    • As a BB (46) I wholeheartedly concur

      Couple tips:
      Finance – non-assessable income re Centrelink

      Holiday Home – TimeShare

  16. Unless those people had wonderful life blowing money on Ferrari cars and traveling around the world I feel rely pity for them. I am in my 35 have same income as they. Let us not forget that market in which they were supposed to buy their 1st house and was 4 times cheaper than today market and average house was 2.5x average income. Their 1.1M house could be 2 house strata in Apellcros – Perth at that time and was about 180k (college of mine lives 2 streets from river in such house, same value)
    They collectively have less equity in their houses, than if they were just renting and saving money on side from 1 salary Her husband brings about 2700 AUD at fortnight home after tax, If they were using her salary for living expenses they would have good life and some 1.4 M + interest on that money. So like i Said unless they have two Testarossas in their garage they blew out their life listening to property wizards. Me personally I would ditch 1.1 M property because it cost them too much to live in (I believe it is unfordable on their salaries) That would erase them most of the debts they have and leave them with about 200k to repay while living in their second best house which is currently rented. In that case they might hope to repay mortgage soon on second investment property and chase up one or two properties of same range (300+k) Such property brings 300$ a week in rentals, and once they hit retirement with about 800$ a week after tax money they would be able to live nice but not fancy days. When super money is spent they can always sell one property and fuel another 7 – 10 years of life. But with no expense for rent and no expense for children 800$ a week is more than they could spend.
    If they stay on mortgages they have they will have 80k loss on interest every year (rent + his salary and some of tax returns) living on maybe 60k a year they would need to reinvest partially to service debt. Than they have so poor life that they can cry over their paper wealth to quote The prince. And tide of property value is pooling back what they will sit is dry debt with no equity left in any houses. For the end I would just like to quote Einstein ” There are two infinite things in life, Space and human stupidity, though for first I am not certain”

    • Feel sorry for them?

      5 burner + Wok burner with built in sink BBQ’s going for $5,000 from Harvey Norman didn’t exist when my grandparents entered retirement.

      Baby Boomers virtually monopolise the demographics for these type of purchase.

      Add in $6,000 outdoor wicker furniture, $30,000 non-functioning 1960’s Lotus/Mclaren/MG’s in the garage as a re-build hobby project are heavily skewed towards this demographic.

      The expectation of vigourous outdoor hobbies, grey nomading and a long european holiday in retirement is also an expectation. The marketing material clearly appeals to this expectation.

      No generation prior to the baby boomers has worked less. 40 hour weeks were only in force after WWII. It appears more and moreso that the generations after the baby boomers will work as little, with overtime hours becoming increasingly common.

      Yet no generation has been as materially profligate as the baby boomers.

      Now, when they are capable of working past 65, there is inertia to trying to modify pension standards upon them.

      I personally find it hard to feel sory for them at all.

      • Some of us don’t ask you to feel sorry and are quite capable of accepting responsibility for our own financial and lifestyle decisions(past, now and future)….I find your broad brush generalisation insulting.
        If there was a party that advocated removing negative gearing, and all the FHOGs, stamp duties, and proposed taxing bank interest at a flat rate I would vote for it. would you?

        • You find it insulting?

          Then consider yourself lucky that my generation has thicker skin, otherwise we might only offer a lifestyle that forces your generation to eat dog food and bathe in kerosene in retirement.

          For the amount of times I’ve heard that I’m lazy, I want i tall now, I spend all my money on iPhones and overseas holidays, etc etc.

          My generation has been vilified beyond belief when an expression of housing affordibility is raised.

          As far as your second proposal, if not for the birth of my child in 2010, I would have ran for a federal senate seat called “The Affordable Australian Homes” party.

          I reckon I would got enough votes on that one.

          Though a flat tax on bank interest? Why would you single out a certain in investment sector?

          Favouring asset sectors is why we have a problem in one in the first place.

          • I’m a baby boomer and have never made any such comments about your generation…so yes, your generalisation is insulting to me…citing your frustration about generalisations made in reference to your generation as an excuse is both lame and irrelevant.
            I would promote a flat tax on bank interest in an effort to convince Australians to save more so that we are not quite so dependent on overseas sources of funds to fund our debt binge……once a new paradigm was established, the tax could then be aligned with other rates levied on other assets. I would do this as part of a transition away from the current skew….a mixture of carrot and stick.

          • In no way is it irrelevant.

            Intergenerational mudslinging will shape perception. It’s of little consequence if one, a few, or every single baby boomer if offended, you are the past. I seek to advance the future, and investing in baby boomers is no longer affordable.

            Once again, you deem it approporiate to favour one sector above all others to acheive a ‘new paradigm’.

            It doesn’t need favourable treatment. it’s real cost/benefit should be expressed in the cash rate. The cash rate, with its direct link to inflation has been understated for nearly 20 years.

            A proper measure of inflation would have seen higher rewards for deposits and lower returns on housing.

            We only require the proper return on savings, not favourable treatment.

            Funnily enough though, a baby boomer seeking favourable treatment on a low risk asset when there is a likliehood for their generation to shift from grwoth assets to fixed income assets… whowuddathunkit!

  17. My question is how do people on these moderate wages manage to acquire such a property ‘portfolio’ in the first place? The answer I suspect will lead us to the core root of our housing (lack of)affordability ratio.

  18. The problem with this couple as with many Australians is that they feel “RICH” as they “OWN” property !!!!
    They don’t own it yet as they are highly geared. The Bank actually owns a large chunk of their so called wealth. They forget this when they spend $300k on renovations as they believe they deserve it and society praises them for it. They are in for a rude shock in a couple of years when they are no longer working and earning a reasonable income. They like so many boomers will have to realize there significant property holdings to fund a retirement. The price of property has only one direction when supply is increased (they start dumping assets)and demand is static like now. This will be the case unless the boomers and the govt can sell the dream to the next generation. They have been trying very hard!!!! FHBG and other demansd side incentives, telling us it is the great Australian dream, nothing better or even more scary, SAFER, to invest in than bricks and mortar, They are in for a shock if there kids and grandkids (Gen x & Y) don’t buy into it. We have so far but maybe the tide is turning.

  19. Sorry, to me these calculations are all unrealistic. I know many people my age (early 60s) look at their homes as an asset toward their retirement. They are not – they cannot be. At best they can only give a marginal advantage if the rent paid for an equal home would be greater than the cost of servicing the owned home.
    This is the only retirement funding potential.
    And selling homes to fund retirement is as rational as selling furniture or cars or any other depreciating asset (which a house is). Any financial advisor who lumps home in with assets without putting a replacement home (even if less cost)in the liabilities side is wrong.

  20. Really interesting analysis and reader comments, thank you.

    I hope the majority here are wrong because I am a late boomer/borderline Gen X who has dutifully followed in my elders’ footsteps and geared into property, without enjoying their in-built advantage of the low entry prices.

    I love the in-depth analysis of the mainstream press reader question and hope you do more of these. So often I read such answers in the investor pages of the newspapers and feel they actually raise more questions than they answer.

    For example, in responding to reader questions about investment opportunities and returns, many commentators quote what seem to me to be highly optimistic rates – I’ve even seen answers of the ilk `If you achieve 9% return your portfolio will be worth X in Y years’ time’. Where do such assumptions on returns come from? Nothing I have read on returns over the last decade (isn’t a decade long term? I don’t have too many decades left in me) show returns doing anything more than barely covering inflation. Crashes seem to be regular occurrences. My own super portfolio has had a recent small jump but was otherwise going backwards or sideways for years, not weeks or months.

    Anyway, again, really interesting analysis and please do more like this one!