Retire at 40

In 2013, there were numerous examples of news reports that highlighted the financial issues associated with Australia's ageing population: too many workers will retire without enough money in their superannuation, the current pension may be unsustainable if more people come to rely on the state and, with the average life expectancy constantly climbing, many people underestimate just how much it's going to cost to live once they stop work.

It's therefore easy to see why people turn to property to build their wealth for retirement. However, according to Sam Saggers, director of Positive Real Estate, sometimes investors can lose sight of their end goal and forget to ensure they are always planning for their retirement.

"If you're investing in property in order to build wealth for your future, you always need to keep retirement in mind," he says. "I mean, at the end of the day, buying real estate shouldn't be for kicks and giggles – we're all looking to get out of the rat race and it's just a matter of how fast you can do that."

So how quickly can you retire? Can you use property to supercharge your wealth and stop work at a younger age? How much risk would you need to take on board to be in a position where you could retire at 40? How much luck would you need on your side? How many properties will you need? What income will need to be generated by your portfolio on an ongoing basis? Is it even possible to achieve if you haven't started yet?

Setting goals

One of the most important steps in preparing for an early retirement, or indeed any form of retirement, is planning and setting goals.

Even though life events – children, marriage, divorce, changes to the economy or your work situation – can make your initial plans look like pipe dream fantasies, having goals will help you structure your investments and give you numbers to work towards.

Sounds simple, but if you don't have a clear picture of what you're trying to achieve, it's unlikely you'll know when to act, when to sit tight, when to cash in and when you're on the right track.

Margaret Lomas, founder of Destiny Financial Solutions, says part of keeping your 'eye on the prize' is knowing why you're investing and tailoring your strategy to achieve those goals.

"It all depends on why you are investing," she says. "Some people are investing so they can accumulate funds to get into a home of their own. Some people are investing so they can make their lifestyle today better. Other people are investing purely so they can create an income to retire upon.

"If that's the case, they should be investing in a diversified range of assets, not just property. You can't just invest in property and hope that's all you're going to need to retire on. You've got to have a strategy that involves a suitable investment in superannuation as well as investing in your other asset classes – otherwise you're probably not going to achieve the outcome you'd like."

Part of this planning also involves incorporating costs and accounting for the realities of investing in and maintaining properties.

"A lot of people overestimate the amount of cash flow that property is going to give them because they underestimate the costs," says Ms Lomas.

"People think if they have $1 million worth of property then it will return them $50,000 – which in theory is true – but then you've got the costs to maintain that property as well, which is going to be probably another one per cent.

"I think the biggest error some people make is not effectively establishing the true costs of holding a portfolio."

If part of your retirement strategy is to liquidate your portfolio and live off the sales proceeds or invest it in term deposits, there are still costs some investors forget to account for, such as capital gains tax, according to Ms Lomas.

She says you don't need a concrete and rigid exit plan when you get started because markets, circumstances and goals change, but she says investors need to have at least thought about how they might get out, so they can make plans around their tax liabilities and get an understanding of what their true net position might be.

Mr Saggers says an essential part of planning for an early retirement is looking at the property market and establishing how much time you're going to be able to give your portfolio to grow. Will you be rushed and panicking if the property cycle doesn't go as you'd envisaged? Or do you have time to wait out a downturn and then let your property values appreciate again?

"I think one of the opportunities for people is to actually start by measuring how far they are from retirement and then link it to property cycles," he says.

"Typically, a property cycle will go for anywhere between seven and 13 years. At the moment, it's probably fair to say property cycles are getting longer. In other words, property isn't necessarily doubling every 10 years anymore; it's probably more like every 15 years.

"So if you were in your 20s and you were looking to retire at 40 – let's say that's 15 years away – well you're going to have to secure a few assets in different marketplaces so that you can be there for long enough for those properties to well and truly increase in value over time."

If you're investing in property in order to build wealth for your future, you always need to keep retirement in mind.

Picking properties

With this in mind, your asset selection becomes crucial.
Mr Saggers, however, says retiring at 40 doesn't necessarily have to be about taking huge risks and hoping it all works out. Instead, he says if you carefully select your properties and focus on slowly, steadily and sustainably building your portfolio, you "can be the hare and win the race".

"I tend to say that if you were to find one property every year for 10 years and you spent on average around $300,000 per property, then after 10 years of purchasing, you actually end up with around $3.6 million worth of property," he says.

Mr Saggers concedes this strategy would leave most investors with an extensive amount of debt, but he says that doesn't necessarily mean you have to delay your retirement plans.

"You can imagine that your debt on that would be relatively high, so over time as your properties increase in value you'd have to work out which ones you're going to eliminate to reduce your debt and which ones you're going to keep to essentially live off,” he explains.

"After 10 years of purchasing, you'd probably then sit on those assets for another five years. If you had a portfolio worth about $3.6 million, your equity position would be about $1.6 million."

Mr Saggers says in this example, you'd need to establish if $1.6 million would be enough to carry you through retirement, but he says even if that's the minimum you achieve, you'd be in a much better position than when you started – "it's certainly better than most people's superannuation bucket".

The key to picking properties that will help you build up your retirement nest egg is knowing which properties will enable you to recycle your deposit more quickly than others in the marketplace.

"If you want to speed up your retirement by buying real estate, it's very important to choose real estate that will recycle your deposit very quickly," he says.

"For example, if you were to put a $50,000 deposit into a property, you want to get that $50,000 out of that property in the form of equity very quickly."

This step, he says, need not be complicated. Instead, it's all about educating yourself on the property market and understanding how different strategies and tactics can add value to your portfolio.

"This is where property strategy really comes into play – buying in the right marketplaces and knowing how to add value to real estate,” he says. “The whole point of things like renovations or doing a subdivision project or looking for the next hotspot suburb should link back to how fast you can get your money in and out of a property deal.

"The faster you can do that, the faster you can then buy your next property. That should then allow you to buy one property a year for the next 10 years. That's how people end up doing it – they choose assets that have good rents, but more importantly, fast recycle times."

Mr Saggers says no property strategy is without its risks, but the more you diversify your portfolio, the safer your overall position should be – particularly if you can afford to stay in the market during a downturn.

"It just comes down to market capitalisation, which isn't a theory of real estate; it's a theory of basic economics. If you put your money in 10 different marketplaces and you've got a market cap of $3.6 million over 10 years, it's going to start to perform,” he says. “When the market goes for a ride, you go with it."

You can't just decide that 60 doesn't suit you so you'll retire at 40, unless you're prepared to make the moves you need to make that happen.

Risk and reward

Retiring at 40 is only possible for those willing to be aggressive, according to director of wHeregroup Todd Hunter.

"They have to be fairly aggressive in their strategy and very well focused. To be able to achieve this you need to be a great saver," he says.

He says 'aggressive' does not equate to excessive or unsustainable risk taking, which is where many people go wrong when trying to speed up their retirement and thus their asset acquisition.

"Aggression in purchasing property isn't about ridiculous risk taking, but about getting out there and buying more properties. There's no point in being 'aggressive' by buying stupid properties in bad areas and taking on big risks,” he says.

"For me, being aggressive is about buying in multiples."

Mr Hunter currently has 40 properties and has just secured his first property in the USA. He says he never loses sight of his retirement plans, particularly when he is investing via his self-managed super fund (SMSF).

"I own my office in my SMSF and I'm relatively aggressive in paying the loan down. I've worked on that quite hard so that if I move my business out of the building and rent it out to someone else, the mortgage will be quite small and I can have a nice income from that," he explains.

Mr Hunter says he also plans to continue to buy properties in the USA through his SMSF, which should put him well on his way to the figure he is chasing for retirement.

His portfolio outside of his SMSF runs two ways, he says.

"I have a bunch of properties that I will keep and I have a bunch of properties that I will sell to turnover to continue to buy more properties and grab the profits to do more renovations," he says.

He says this way he doesn't have to get additional loans to finance the renovations that will ultimately lead to a more valuable portfolio.

"Once the renovations are sorted, I will become fairly aggressive at paying down my investment debts to build up that passive income quicker and quicker," he says.

Ms Lomas, however, reminds investors who are approaching retirement or who want to speed up the process that there is often a direct correlation between fast rewards and bigger risks.

"You can't just decide that 60 doesn't suit you so you'll retire at 40, unless you're prepared to make the moves you need to in order to make that happen," she says.

"You need to recognise that it's not going to happen for everyone because some people are investing to the best capacity they can and aren't prepared to take on any more risks."

Ms Lomas says it's all about balance and planning. She also cautions those who are already close to retirement not to do anything rash in the hope of cutting back on the final few years in the workforce.

Younger people have room to move, plan and endure a few bumps in the road if things don't go to plan, she says. Those with less time, however, don't want to risk losing everything.

"I don't recommend someone who is a little bit closer to retirement should start taking higher risks. It's better to end up with something a little bit more assured and slightly lower than something that might just disappear altogether," she advises.

Buying real estate shouldn't be for kicks and giggles – we're all looking to get out of the rat race and it's just a matter of how fast you can do that.

Today's money in tomorrow's market

One of the biggest problems people encounter when planning for retirement is knowing how much money they will need, particularly when you factor in the changing value of money over time.

In September 2013, a report by Deloitte found increasing life spans and the devastating effects of the global financial crisis (GFC) on some people's superannuation funds meant many people were inadequately financially prepared for retirement.

Indeed, the superannuation guarantee wasn't introduced until 1992. Even then, employers only contributed three per cent of an employee’s salary. This figure was increased to four per cent for employers with an annual payroll of over $1 million.

It's no surprise then that some people will be forced into a retirement where they won't achieve the lifestyle they were seeking.

Deloitte's report, however, highlighted that even those who will have the benefit of compulsory superannuation contributions from their employer for their whole working lives may still struggle to have enough savings for the retirement they're expecting.

Ms Lomas says a large part of the problem is that people believe they can retire on far less per annum than they've been accustomed to during their working lives, and this isn't always the case.

"Contrary to popular belief, you're not going to need any less to live on when you retire," she says. "You might think you will, but you won't. The only real difference is, for example, if you have a bunch of kids who you expect to be grown up by the time you retire – then you can make adjustments for the costs of having kids.

"But apart from that, your own lifestyle is going to pretty much stay the same, or hopefully even improve.

"If you have kids and debt at the moment, when it comes to retirement you'll probably need around 60 per cent of what you currently live on. As a net figure, that's really what you should be aiming for, but people constantly miscalculate this."

This seemingly simple idea, however, can become complicated when you're trying to establish how much your money will be worth in 10 to 15 years’ time.

Yet, Ms Lomas says the calculation can quite easily be worked out online.

"There are plenty of calculations online based on the time value of money going on what the CPI has been over the last 10 or 15 years. We have a pretty steady CPI – in the main it moves within a certain range,” she says.

"So you just have to work out the amount you need, which is usually around 60 per cent of what you live on now per annum, and then just extrapolate that and project that forward."

She says part of this process is working out the income you will need your portfolio to generate and what proportion of your assets will need to be debt free in order to achieve this.

"Generally speaking, property is going to return around five per cent to you – with some doing three per cent and some doing seven per cent,” she says.

"If, for example, you work out that you need $100,000 to live on per annum, then you're obviously going to need $2 million worth of debt-free assets. That could be a $4 million portfolio with $2 million worth of borrowing, where the other $2 million is debt free.

"It's just about working backwards."

Mr Hunter, however, warns investors that the normal or predictable financial rules may not apply in the future.

"It can be very difficult to work out how much you're going to need in 10 or 20 years' time," he says. "Normal CPI rules don't apply anymore. We've seen electricity prices double in the last few years for most people. That is well and truly beyond CPI, so how do you factor in those things that could occur in the future? It is pretty difficult.

"Some experts believe $750 a week is what a single person currently needs to retire on. So if that's the case, in 20 years' time, what is it? Is it going to be $1,500 or $2,000 a week?"

Mr Hunter says one of the biggest risks for younger investors trying to build towards a quicker retirement is losing sight of their goals and assuming the desired figure will just be achieved 'in time'.

"You've got to work towards a number like that, but it's certainly not easy to achieve. You've got to work towards it and plan for it,” he says.

"Some investors' motivations fly out the window about two years after they begin investing. Also, keep in mind that goals change, babies come along, houses get upgraded and new cars get bought."

Mr Hunter, who is working towards achieving $5,000 per week in retirement for himself and his partner, says given the changing value of money and the uncertain future of the pension, young investors shouldn't take their eye off the prize.

"If you know you have a while until retirement, it can be easy to let go of that motivation,” he admits, “but if you want to achieve something that most people don't – such as retirement at 40 – then relaxing isn't really an option."

Investor Profile

Jim Hall

‘I will have a $2.5 million portfolio when I turn 40’

Jim Hall, 36, started investing in property in 2007 after years of procrastination. He purchased a home with his partner, Michelle, in Petersham in Sydney’s inner west and was then able to release equity to purchase an undervalued property in Eagle Vale for $247,500.

Jim now has five properties, including his home, and is currently refinancing in order to continue purchasing.

He admits he will not achieve his original goal – to have 10 properties by the end of 2013 – but says he is on track to have a $2.5 million portfolio by the time he turns 40.

“Obviously things change and don’t always go to plan,” he says. “We realised we needed to move house and it’s better to do it now. This has obviously delayed my acquisition of investment properties, so my immediate goals have changed – but not my overall strategy and not my overall end goals.”

Jim says his deposits for previous purchases have all been funded by savings and equity he has extracted from the family home. He therefore still has plenty of room to invest using equity from his investment portfolio.

“I haven’t used any of the equity I’ve built up in the investment properties yet,” he says. “So, for example, I have a property in St Andrew’s in Sydney’s south west, which I bought for $250,000. We spent about $80,000 doing a renovation and it has recently been revalued at $450,000.

“Over the next 12 months, I’m going to use as much equity as I can from the investment properties. I’m hopeful that over the next 12 months I should be able to get another four properties.”

Due to his young family and the associated ongoing expenses, Jim says he requires properties that offer strong rental yields. His strategy has therefore centred on purchasing undervalued properties in Sydney’s west. He says his next purchases will probably be in comparable regions in Queensland, such as Logan.

He has also focused on growing the portfolio quickly rather than building up large deposits.

“My investment properties have largely been high loan-to-value ratio (LVR) loans – around 95 per cent. The strategy was to get as many properties as possible, rather than using 20 per cent deposits and then having to wait around for more savings or equity to become available,” he explains.

Jim’s portfolio is currently worth $1.3 million and his family home is valued at around $1 million. He is confident he will have $2.5 million worth of investment properties by the time he turns 40. However, he concedes if he was to retire at 40, he would have to start taking far greater risks.

“I’m not aiming to retire at 40,” he says. “By that age I just want to be in a position where I have built up a healthy portfolio. It won’t be debt free, but it will build the foundations so that I can begin paying it down and eventually have a stable retirement.”

He says when people are building up their retirement nest egg via property, they need to remember they won’t always make fast money.

“It’s the very early days of property investing for me. Sometimes you want to make a quick buck and that can be the hardest thing,” he admits. “But once you move past that and see your portfolio growing, it’s very easy to get the property bug.”

Investor Profile

Paul Glossop

Avoiding costly mistakes.

Paul Glossop, 31, started investing in 2010 and already has a portfolio of five properties valued at over $2 million.

He and his wife, Kim, are using property to build up their wealth for retirement and to create a nest egg in case they can’t rely on superannuation.

“My wife is Canadian, so part of our potential long-term strategy is to maybe move back to Canada,” he says. “So we’re not just looking at short-term value growth. Rental returns are obviously important at the moment, but we also need to look for capital gains down the track. We want to make sure we have the ability to have something as a nest egg because we’re not necessarily going to be investing in super if we move back to Canada.”

According to Paul, structuring your finances correctly is essential to building your portfolio quickly, especially for those looking to speed up their retirement.

Investors also need to realise they are likely to make mistakes.

“The worst decision I made was to buy a dilapidated house in Muswellbrook in New South Wales mid-way through 2012 as a renovation project,” he says. “In hindsight, it was a terrible time to buy there and it was also a challenge for me because I renovated it myself. It’s four hours from my home, so that meant every waking moment I had spare I was driving to Muswellbrook, doing a couple of days work and driving back.

“I did that for about two months’ worth of weekends. In return, I am left with a house that has not appreciated beyond what I spent on it.”

Paul says investors can reduce the risks of such mistakes by learning as much as they can about the market.

“Good advice is a hugely important factor,” he says. “Advice and understanding the numbers and understanding the market will make a huge difference to your success.”