Investment Strategies for Self Funded Retirees – Comparison

stevetaylor

8 years ago

Investment Strategies for Self Funded Retirees

We have a question about investment strategies from a self-funded retiree. He has $1 million in the bank, does not want to risk his money but is now only getting 2% interest. His question is “Can Steve suggest how I can get a better return on my money, but at the same time have a safe investment?”

I am currently receiving enquiries from several people in this situation. I had one recently from a fellow who had sold his farm last year to a coal mine for $2 million and his $2 million was just sitting in a bank.

He is now following my suggestion to buy four of our executive 5 bedroom homes in Brisbane for $500,000 each.

It is very likely that I would also suggest that the person asking this question buy two of my investment homes with his $1 million however, I would need to have a look at his overall situation.

Comparison Investment Strategies for Self Funded Retirees

Let’s compare his $1 million in the Bank against buying two of our homes in Brisbane for $500,000 each.

With his $1 million receiving 2% interest, he would earn $20,000 per annum and then pay tax on that.

On the other hand, one of my homes at $500,000 will rent for $480 per week giving him a net return of $17,500 per annum i.e. with two homes his net return would be $35,000 per annum.

That is a return of 3.5% – a lot better than 2% from the Bank.

However, the return is actually a lot higher than 3.5%. Over the last 44 years, the average price of a home in Brisbane has doubled every 8 years. For the sake of this hypothetical exercise about investment strategies, let us be conservative and work on the price of a house in Brisbane doubling every 10 years.

If the price of a house in Brisbane doubled every 10 years, what would that rate of inflation be? It would mean that the average price of a house in Brisbane averaged a price increase of 7.5% per annum.

If he is getting 3.5% nett income and a capital gain of 7.5%, this means he is really getting 11% per annum.

On his 2% interest from the Bank, he has to pay income tax, however due to the Federal Government incentive to create new housing and general depreciation, the fellow who used his $1 million to buy two houses in Brisbane at $500,000 each, will also be able to claim over $22,000 off his income of $35,000. In other words, whilst his income will be $35,000 he will only pay tax on $13,000.

Investment Strategies for Self Funded Retirees

Comparison Investment Strategies for Self Funded Retirees

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