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MAKING INVESTMENTS FOR RETIREMENT
Copyright © 2005 John Hopkins

When your customary lifestyle can be maintained without reliance on gainful employment, you can claim to be financially independent.

This happy state is attained by only a small proportion of the population. Insurance actuaries estimate that no more than 5 to 10 per cent can truly claim inclusion in the club.

Most people accept, albeit resignedly, that retirement from work will entail a reduction in lifestyle spending. Most of those who fail to appreciate this fact when they collect their final pay cheque soon come face-to-face with reality when, like governments, they find themselves indulging in deficit budgets. Their problem is that they don’t have recourse to the printing presses of a Central Bank.

Increased longevity exacerbates the situation. It is easy to underestimate the length of time for which income must be maintained and the calls on capital made by prolonged and unexpected episodes of geriatric illness. And when inflation is rampant, capital erosion becomes inevitable.

It would be fair to say, then, that true financial independence is unattainable for the majority. But there is a percentage of the population who could achieve it—but don’t. They underestimate the amount of capital necessary; they underestimate the time-span from retirement to death. As a corollary to both of these, they underestimate the necessary commitment to save while working and the required length of that commitment.

Obviously the greater the saving and the sooner it is instituted, the more likely it will be that a retirement lifestyle is not diminished.

Compulsory superannuation has been hailed as a panacea for retirement blues. I have some problems with this prescription.

It is unlikely that it will be politically possible to set a level of deductions from the salary of all wage and salary earners that will be high enough to produce real financial independence. It is probable that there would be considerably more objecting improvidents than compliant frugals—and votes in marginal electorates have been known to carry weight.

For most people, a compulsory super payout may be sufficient to wipe out eligibility for an Age Pension—but not large enough to match a pre-retirement salary. At least its payment would be guaranteed for life.

There also could be doubts about the level of returns that might be expected from what may become unwieldy and bureaucratically directed super-funds.

All of which leads one to the conclusion that, when real financial freedom is the goal, it is essential to commit to an effort beyond the norm and to ensure the selection of an investment medium that will maximise returns.

I would suggest to you that long-term investment in prime property has been the chosen path of the great majority of people who have achieved financial independence.
It is a path that can be followed by those with a variable combination of some or all of the following: cash reserves, adequate spare income or other property with which borrowings may be secured.

The acquisition of prime real estate can be undertaken by large and small investors. The building up of a property portfolio is a very real option for both. It’s not a process that occurs overnight, but in the 30 years I have been in the industry I have seen it happen for committed clients, in for the long-term and determined to secure their future independence.

Prime investment property has five essential characteristics not shared, entirely, or to the same degree, by other modes of investment:

- Capital growth
- Income growth
- Continuing income returns
- Tax advantages
- The ability to be easily and acceptably geared

It is the possession of all these features that enables appropriately credentialled investors to invest if they can support a loan, pay its interest and claim legitimate tax deductions for negative gearing and depreciation allowances.

John Hopkins