Keep or sell investment property in retirement


Keep or sell investment property in retirement

As you can imagine, every day I see and speak with many people who are preparing for retirement or who have already retired and do not have the level of income they believe they need or should have from their saved assets.

My first step is to go over all the financial and non-financial assets that the person or a couple have, as I need to know which of the test is the dominant one when calculating eligibility for Age Pension either now, or in few years’ time. I need to know, is it the Income Test of the Assets Test that has the biggest impact on the outcome.

Today I would like to concentrate on property investment from the perspective of your planned or existing retirement.

In most cases, rental property is a fantastic investment when we are working and growing our nest egg. That is because property is a good growth asset, we have our work income to deal with any problems along the way and we are young enough to deal with any pitfalls.

However, retirement is different and very often your property investment may not provide the best retirement income outcome. Let’s see why:

  • It is an illiquid asset, you either own the full property or no property at all. You cannot sell part of it to supplement your income, unlike shares, managed funds, superannuation funds or a pension fund – subject to meeting specific rules, or even a simple term deposit or other cash accounts.
  • Property tends to provide a lower level of income. That could be due to the following factors:

1. possible low yield in the area, that is impacted by the state of a property market and not your decision at all,
2. you might have an outstanding loan, that is reducing your income even further,
3. property ongoing costs such as insurance, council, real estate agent fees
4. ongoing property maintenance that could add significant expenses5. your income is dependent on making sure that you always have tenants, and that you have tenants that without any problems and delays, will always pay the rental income on time.

All those costs can be very high and not leave a lot of income for you to live on, therefore very negative for your cash flow. Also don’t forget that once retired, you no longer benefit from any tax deductions, as often your tax bracket is Zero, or at the lowest tax rate.

You could argue that property is great for capital growth, and it is correct, however I am going back to my previous statement, property is illiquid asset, you cannot sell a window to provide for your income for the next year.

Therefore, if you have an investment property and you are getting ready for retirement, you really have to get an outside opinion to confirm if the property is worth keeping in retirement, whether it provides you with sufficient level of income or is it costing you money.

You need to correctly assess the return on investment for the purpose of your retirement needs.

From the Age Pension perspective, I can see in most cases property being an asset that can stop you for having access to part Age Pension.

When I see clients and prepare advice for them, we often agree to compare scenarios of retirement with the investment property in place and after selling the property and investing money as per my advice.

This provides a very clear picture as to which outcome is better for your lifestyle, level of income, access to any government benefits if possible, as well as value of assets over time. Therefore, a full understanding of your financial situation is critical.

There is also another big problem you have to know how to deal with, and that is Capital Gains Tax, that can be a substantial bill when selling your property investment. You have to understand your assessable Capital Gains and what can be done to minimise the tax, long before you sell your residential property, or any property for that matter.

And again, this is where the advice of a financial planner specialising in retirement planning is invaluable.

I discuss this with clients all the time, as you have to get your timing right, you really have to know the best timing for the sale from the point of view of the overall market and your gross taxable income. If checked and done correctly in many cases an experienced financial planner can save you thousands in capital gains tax, leaving more money in your pocket and for your retirement.

So if this is you, if you are tossing and turning not knowing if you are better off keeping your investment property or sell it, just contact me directly here in my website: 

“Retirement is a Journey, not a Destination, so be well prepared for the ride” 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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