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Before you splurge on the latest pair of trendy sneakers, grab that $100 foot scrub at MECCA, or hit up Uber Eats instead of cooking at home, I want you to take a moment to think about a few sobering stats. Most Australians are earning just over $91,000 a year. Sounds decent, right? But here's the kicker: a lot of us are going to retire with only around $450,000 in our super fund, and many won't even own their homes by the time they retire. If that doesn't sound like a one-way ticket to living close to the poverty line, then I don't know what does.
Take a recent study, for example, showing that nearly half of people renting are already living in poverty. Yeah, that's right - renting isn't just a temporary situation anymore, it's becoming the norm, and not a great one at that.
Home ownership in Australia has been on a steady decline. Back in 1961, about 70% of households owned their homes, whether outright or with a mortgage. Fast forward to the latest ABS census in 2016, and that number dropped to 67.1% - the lowest it's been since 1954. The great Australian dream of owning your own home is slipping through our fingers.
Now, let's talk about superannuation
As of June 2021, the average super balance at retirement was about $402,838 for men and $318,293 for women. There's a lot of debate about how much you actually need in your super to retire comfortably, but according to the ASFA Super Guru website, if you were born in 1964, you should aim for $453,000 by age 60. For a 'comfortable' lifestyle, they suggest a balance of $595,000 for singles and $690,000 for couples by the time you hit 67. That's supposed to cover you until about age 84, giving you an annual income of $51,278.30 if you're single or $72,148.19 for couples.
But here's the catch - those averages are skewed by a small group of people with much larger balances. So, while some might be sitting pretty, the reality is that many Australians are well below these numbers.
Let's not forget the age pension, which is currently $1,020.60 per fortnight for singles and $769.30 for each member of a couple. Now, compare that to the poverty line, which is $489 per week for a single person or $1,027 per week for a couple with two kids. It's no wonder more than one in eight people (13.4%) and one in six children (16.6%) are living below the poverty line after you factor in housing costs.
What does this have to do with property?
According to the ABS, for lucky Australians who can buy a property, the biggest asset most of them own by the time they retire is their home - outshining their superannuation asset value by more than three times. Why? The combination of capital growth and leverage provides middle class Australians who have average to little savings capacity, the opportunity to accelerate their wealth and play catch up.
Again, according to the ABS, the average disposable income in Australia is $58,488 per year and on average we can save around 15% of our disposable income (income after necessary costs), so that is $8,773.2 per year for an average earning Aussie.
Say you know of a couple, Sal and Pete. They are 35 years old and don't want to retire at the official retirement age if they can help it. They've managed to save $15,000 per year for 5 years. They have worked out they want a $150,000 passive income which would mean savings of around $3M earning 5% yield per annum.
If they kept relying on their savings, it would take them 200 years to save $3M. If they wait until they retire at 67 and rely on their superannuation balance, they will have around $900,000 according to moneysmart's superannuation calculator, which, with inflation at around 2.5% will be equivalent buying power of around $400,000.
Sal and Pete have decided they can't wait 200 years (who among us can?) to save for an early retirement and don't want to rely on super. So, they have $75,000 and want to invest it.
What are their investment options?
If Sal and Pete invest $75,000 into a basket of shares and achieve a return of 10% per year, they will have $194,000 at the end of 10 years. If they continue to contribute $15,000 per year to their basket of shares, they will have $433,000 at the end of 10 years.
If they invest their $75,000 towards a deposit on a property valued at $650,000, and their property achieves a capital return of just 7% they would have a property valued around $1,500,000,000 - minus the amount they borrowed that would equal $900,000. If they continued to contribute $15,000 per annum their equity or result would be higher.
As a real asset that is relatively easy and cheap to leverage (compared to many other asset classes) and can provide very strong capital growth and stable yields, property represents a very good way for average Australians to build their wealth quickly.
So, next time you're about to indulge in some retail therapy or order takeout, just remember, the future may not be as cushy as it might seem right now. Perhaps you'd be better off paying down a mortgage.
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