We have now been settled into our Wealth Creation Centre at 19 Rooney Street, Richmond for just over a year.  Upon reflection of the past 12 months, it set me thinking about a common theme I’ve noticed, particularly since the move to Richmond. The number of people, particularly those approaching retirement age, who are ‘asset rich and cash poor (click here to read Blog by David Ramsay) has both intrigued and interested me.

With surrounding suburbs including Toorak (median house price of $2.65 million¹), South Yarra, Windsor, Malvern and Hawthorn, it is no wonder so many people have worked hard to pay off their homes.  However, as these people approach retirement, it is common to see small superannuation balances and few income-producing assets.

This made me question what I would do if faced with the same dilemma.  Would I retire in my lovely home with a small income or the Age Pension? Or would I do the ‘unthinkable’ and sell up and rent?

Let’s explore these two options…

‘Richard and Jenny’ are in their late 50s, have worked hard all their life, and recently paid off their mortgage.  They now own their $2.65 million home outright.  Having strong incomes throughout their working life and funded private school fees, home extensions, and renovations whilst maintaining a ‘comfortable’ lifestyle, they have accumulated combined super balances of $300,000 plus a share portfolio of $200,000.

They would like to retire at age 60 and live on $100,000 per annum to enjoy their ideal lifestyle.

If ‘Richard and Jenny’ remain in their home and draw $100,000 per annum for expenses, their money will only last about 6 years* by which time they will qualify for full Age Pension (a combined income of approximately $32,400 pa). With maintenance costs, rates and upkeep, this leaves little room for holidays, eating out and helping their grandchildren with school fees.

Now, let’s assume ‘Richard and Jenny’ are open-minded and, whilst wanting to remain in a similar home, are open to renting their accommodation. If they sell their home for $2.65 million, invest the proceeds in a diversified portfolio of productive enterprise, and rent a house in the same street for $900 per week (median rental cost in Toorak²), they save approximately $5,000 per annum with rates and maintenance costs now covered by their Landlord.  This reduces their living costs to $95,000 per annum.

Annual income from their investments is approximately $134,950 per annum, which includes a small amount of tax back each year. This would cover rental costs of $46,800 per annum and go a long way toward funding their $95,000 per annum lifestyle expenses (a shortfall of only $6,850 per annum). ‘Richard and Jenny’ are able to top up their income by accessing superannuation funds, and their total wealth would grow over the long-term (albeit fluctuating with the market in the short-term).

The important point I make is, with sufficient passive-income to meet your expenses, you can achieve financial freedom to live the life you want to live, with confidence the income will be there each year.

Being a tenant does have its drawbacks though.  It can be particularly difficult for those with pets; there are restrictions on modifications you can make; and a risk your lease is not renewed.  However, if faced with the choice between lifestyle assets or living the lifestyle of your choice, it is definitely an option worth considering.

It’s also important to remember the value of the investment can be volatile, fluctuating over time. It’s worth noting around one in every three years the value of the investment will end the year lower than it began (whilst it’s not quite as predictable as this, it shows it is not possible to time your way in and out). It’s possible the dividends produced will also fluctuate, as they represent the profits of companies, something that dropped by around 25% during the Global Financial Crisis. For these reasons, the importance of engaging a Financial Adviser is emphasised, particularly given this is something most people find uncomfortable, perhaps even scary.

This dilemma was something recently explored by Scott Pape, ‘The Barefoot Investor.’³

*Based on the following Assumptions:

Investment Type	Income pa	Franked	Growth pa
Superannuation	4.10%	17.35%	2.97%
Share Portfolio	4.50%	100%	4.00%
Rental cost of $900 per week based on median rental costs in Toorak. Assumed rental increase of 3.0% per annum.