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Setting The Goal For Retirement

A couple with a strong income wanted to see if investment properties could help them in their golden years. They were pleasantly surprised, writes Stevie Waring.

By: Stevie Waring

1 August 2022

The Situation

Tim and Jo are 51 and 55 years old. They’re both self-employed and own their own home. Tim’s been running his company for 20 years; Jo is a midwife.

Together, their household income is about $300,000 per year.

Until this point the pair focused all their efforts on becoming mortgage-free, which they were not far off. But, since they were nearing retirement, they wanted to see if investment properties could help them prepare for the future.

Setting The Goal

Tim and Jo had big (and specific) plans for their retirement. They wanted to:

  • maintain their current lifestyle in retirement
  • pay off the mortgage
  • have enough spare to help their children.

When creating a property investment plan you need to ask yourself: “How much money do I need to make this a reality?”

The pair decided they would need $105,000 in income yearly (before tax). That would let the couple maintain their current lifestyle (since Tim and Jo won’t be paying a mortgage in retirement).

They also decided they wanted to retire in 12 years. This allowed them to calculate how many assets they would need to achieve this goal. In this case it was $2.625 million worth of net assets.

What's The Wealth Gap?

Once they figured out how many assets they would need, they could determine whether they were on track to have enough to support their goals. They had $250,000 in KiwiSaver, and planned to contribute towards this until they retired.

And because the pair were close to retirement, they had the confidence to include the NZ Superannuation within their plan. If Tim and Jo invested in nothing else, they were already 60 per cent of the way towards their goal.

But, like most couples, Tim and Jo had a wealth gap. There was a 40 per cent difference between what they were on track to have and the retirement dream. So if Tim and Jo didn’t grow their investment, they’d have to trim back their lifestyle by $44,400 a year in retirement. They’d need to build an extra $1.1 million of assets in 12 years to close this gap.

The Plan

Together, we created this plan.

  • Year 1: Buy a townhouse in Christchurch – New Zealand’s most undervalued property market.
  • Year 3: Buy a townhouse in Auckland – New Zealand’s largest and fastest growing city.

The estimated capital growth on just these two properties would help them achieve 92 per cent of their goal, according to our projections. This would get them just shy of $100,000 in passive income.

The Decision

Together we started looking at properties in the Garden City. But, while doing this, the couple asked themselves: “What if we bought two properties now, rather than waiting another two years to get the second one?”

They had the equity and incomes to do both, so they were comfortable they could manage both purchases now, instead of waiting. They purchased a new-build townhouse in Christchurch that was close to being completed, so they could settle it quickly. They then put an Auckland property under contract with a much longer settlement. This meant they signed the contract, locking in today’s price, but had 18 months breathing room before they needed to settle. When they re-ran their numbers they realised that bringing forward that purchase would allow them to blow past their initial target and hit 107 per cent of their retirement income goal.

Until this point, the couple had channelled their extra money into paying down their mortgage. But at current interest rates the two investment properties would be negatively geared and needed topping up. Tim and Jo realised this would add two years to their personal mortgage if they immediately bought both investments. This is a trade-off they were willing to accept.

The Lessons

While the couple still has work to do, we can learn three lessons from Tim and Jo.

  1. Get a plan – everyone will retire at some point. Tim and Jo created a plan early to figure out whether they were on track (or not).
  2. Increase your assets – many Kiwis simply do not have enough assets to see them through a comfortable retirement. Here, Tim and Jo acquired more investments because they saw they had a wealth gap.
  3. Challenge previously-held assumptions. Paying down their mortgage quickly was important, but they can buy more investment properties by slowing down their repayments. This is forecast to put them in a better position than if they’d waited until their mortgage was gone.

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