There is no debate that Australians love investing in property. The value of Australian residential real estate at the end of August 2024 was an estimated $10.95 trillion.
Some people are so passionate about property that they believe it’s a better option for providing a retirement income. They see property as a more tangible and reliable investment. Often choosing to take their super as a lump sum on retirement to buy property. Others might use a windfall, such as an inheritance, or the proceeds from downsizing the family home, in property instead of their super.
Given that a retired couple over 65 needs an estimated yearly income of $73,337 to lead a comfortable lifestyle, the question is whether a property investment would provide enough?
While it’s true that a sizeable property portfolio could deliver rental income to equal a super pension, it might mean missing out on some useful benefits.
After all, super is a retirement savings structure with significant tax advantages. It also has the flexibility to provide investments in a range of different asset classes, including property.
Meanwhile, super fund performance has, generally speaking, overtaken house price movements over the past decade. Super funds (invested in an all-growth category) returned an annual average of 9.1 per cent during that time while average house prices in Australian capital cities grew 6.5 per cent per year over the same period.
Past performance can’t guarantee future results. The average numbers often hide the highs and lows – years of strong returns and years of losses. What really matters when making an informed decision are your financial goals, your investment timeframe and how much risk you’re comfortable with. These factors will guide you toward the best choice for your situation.
Liquidity
One of the most significant differences between super and property investments is liquidity, or how quickly you can convert your investment to cash.
With super, as long as you’re eligible, you can access your funds relatively easily and quickly. On the other hand, if your wealth is tied up in property it may take some time to sell – and you might not get the price you’re hoping for.
Nonetheless, both property and super investments are affected by market cycles. They can be affected by volatile conditions and may deliver negative returns just at the time you need access to a lump sum.
Long-term investing
Superannuation is designed for long-term growth, often spanning decades as you accumulate wealth over your working life. The magic of compounding interest can lead to substantial growth over time, depending on your investment options and the state of the market.
Property investments, on the other hand, can be invested for short, medium, and long-term growth depending on the suburb, the street, and the type of house you invest in. Of course, there are additional costs in buying a property (such as stamp duty) plus costs in selling (including capital gains tax). If there’s a mortgage over the property, you’ll need to factor in the additional costs of repayments and interest (bearing in mind that interest on investment properties is tax deductible).
Risk appetite
Your attitude toward risk also plays a big role in choosing between super and property.
Superannuation funds are typically diversified across various assets, which helps to spread and reduce risk. On the other hand, property investments focus on one market meaning that while there might be a big benefit from an upswing, any downturn could take a serious toll on your portfolio.
Making an informed choice
Ultimately, any decision between superannuation and property should align with individual financial goals, risk tolerance, and investment strategies. And, of course, it doesn’t need to be one or the other – many choose to rely on their super while also holding investment property so it’s best to understand how super and property can complement each other in a well-rounded retirement plan.
Next steps
With lots to consider, contact your local Nexia adviser to help you analyse your retirement income strategy and develop a plan that works for you.
