Property for Wealth Accumulators

Last week I described the investment strategy for a ‘retired’ couple who had created $1.2 million through the sale of their business and wanted options for their income replacement.  They chose managed funds. 

This week we look at a professional couple with two young children.  They are on six figure incomes and struggling to see how they will ever achieve a six figure income in retirement.  For this couple property absolutely makes sense as a means to achieving their ultimate goals.

Once again, the investment portfolio is the servant of the plan – the property(s) are not the plan

The plan is to:

• Pay off the $450,000 mortgage in 20 years
• Create a minimum retirement income of $80,000 equivalent at 65/60 – preferably $100K
• Continue current lifestyle if possible (they are living on $143,000 net of tax, ACC, KiwiSaver)

The position to manage is: (quantifying)

Budget surplus is purported to be $500 per month, however their cash reserve savings are only $8,500 and there is credit card debt and a small overdraft.

We looked first at the mortgage – if we increased payments by an amount of $300.00 per month – we saved $80,000 in interest and had it repaid when AS was 67.  Strategy 1

Next the retirement plan.  Our goal – A similar income to current lifestyle, at the moment that equated to $80,000 – assuming the kids were gone and the mortgage paid off.

That didn’t look so good.  With current contributions to KiwiSaver and a small managed fund – Mr AS had to work to age 70 and when Mrs BS was age 65 their income would reduce to $65,000 (adjusted for inflation)which included both National supers.  When I pointed out this was equivalent to a $1,250 monthly reduction from today’s budget – they got the picture.

Strategy 2 had to achieve better than simply hoping KiwiSaver and National super were going to be the answer.  Their house was going to be worth $2.5 million in 23 years but they had no desire to live in Levin. (Sell up and go to the provinces)

Downsizing might occur but capital expense on a maintenance free town house in wellington was likely to deliver minimal surplus.  We looked at investment property.  A couple of cash flow positive (after tax rebates) rentals. 

A small two bedroom in Avalon ($300,000 - $350.00pw rent) and a two bedroom city apartment ($500,000 - $500.00pw rent).

Assuming a 6% growth and interest only on the mortgages, the total net worth was $1.0 million better off at age 70/75 and we could achieve an $80,000 income at 65/60 and a $100,000 income if we waited to 70/65.  We did the numbers carefully and budgeted the changed income and expenditure, Strategy 3 (financial control). 

Our surplus monthly cash flow had diminished only slightly, but we would need to hire an Accountant to re-arrange our tax structure to ensure cash flow remained positive (IR23BS).

In summary

• We maintained similar and ongoing lifestyle
• We increased net worth (probable) by $1.0 million in 23 years
• We delegated property management in total
• We achieved a six figure retirement income (probable) at 70/65
• We could either leave the $2.5 million home to the kids or use equity via reverse mortgages for capital expenditure
• The major insurance retained would be their would be their medical plan and asset protection for landlords cover/house cover.

Or, we could take a reduced income at age 65 and cash up the home – renting or moving to the provinces – they chose the property option.  Just as thousands of New Zealanders have.