Should we buy property or use a managed fund in retirement?

(Readers should note:  The strategy is designed for a retired couple – it does not apply to accumulators)

I was asked the other day, by a 65 year old couple, what they should do with their capital from the sale of a business.  Their home was freehold and they had one hundred thousand in loose change, tucked away in various banks.  Some in term deposits, some in savings and cheque accounts.  They had 1.2 million in investable funds.  Whilst historically their lifestyle had not been lavish, because their children were in Australia and Canada, travel was really going to cost them for the next 20 years at least.  Regular visits to the grand kids was a priority. 

They settled on an $80,000 per annum income adjusted by 2% for inflation as a realistic income for the rest of their lives.  Mrs ‘B’ wanted to make sure there was money for each of their three children when they died – Mr ‘B’ was not as adamant.

Mrs ‘B’ won the day.  I asked her if a million dollars was enough for each child and did her Mum and Dad leave that amount to her.  She felt a million each was adequate.  I pointed out that their current home was valued at 1.0M – at a 5% growth rate that equated to over 3.0M by the time the couple were in their 90’s.  If their health was maintained and they didn’t need to enter long term care – was this a viable option if we mitigated risk through medical insurance, reserve funds and a net of tax investment income of $80K (inclusive of 1 state pension).  We agreed on this as “Strategy A”. 

We looked at various property options.  I’m an apartment fan for property investors but I also own various other properties in Wellington and Australia.  The retired couple were drawn to Australia as a viable tax deductible travel option as two children lived there, but were hesitant with the Aussie market.  We considered flats in the Johnsonville/Newlands area, apartments in Te Aro and 3 bedroom homes in Ngaio/Kaiwharawhara.

1.2 Million might buy us                       3 x 2 bedroom flats; or

                                                            3 x 2 bedroom apartments; or

                                                            2 x 3 bedroom homes

We did some numbers from the latest property information available – market values, rentals and deducted annual expenditure for each.  Made up from:

            Maintenance at                                    $5,000 pa                    each

            Rates (where applicable)                    $2,000pa                     each

            Body Corp Fees                                  $3,600pa                     each

            Insurance (where applicable)             $1,000pa                     each

            Mgmt fees at 8% of rental income

The flats (+ 1 pension)                        delivered          $42,300pa

The apartments (+ 1 pension)            delivered          $61,800pa

The houses (+1 pension)                   delivered          $47,800pa

These incomes are after expenses and before income tax

The pension was calculated at today’s single rate of $18,800pa and the reason we decided on this was twofold.  We wanted the plan to survive with only one party and we would always use the second pension for a travel back up fund.  Even though the market value of each of these property portfolios (without the family home) was likely to be over 4.0 million by the time they died – they agreed their lifestyle would be seriously compromised due to the lower income – around $20Kpa less than required)

They chose a managed fund, delivering an income of $80Kpa inclusive of 1 pension net of tax.  Their 1.2 million at 4% (after tax, fees and inflation of 2%) would last to age 88.  At 3% (real return) 1.2 would last to age 85 and at 5%, 92.  Their annual draw-down (income) from age 65 had grown to $126,000 at age 88 and their pension or pensions from the government would last for life (inflation adjusted).

Mr and Mrs ‘B’ are growth investors.  They were happy to accept market volatility and a heavily weighted equities portfolio.  Their critical outcomes of income ($80K net of tax), transparency, liquidity and probability were most viable through using a planning procedure (Strategy B) the portfolio (Strategy C) became the servant of the plan.  The risk mitigation (Strategy D) – consisting of:

• a regular on track review process
• cash reserves
• medical insurance
• estate planning (home in Trust for the three named children)
• budgeting

Another satisfied FoxPlan retired couple!