Across Australia there are property investors who, on paper, have done very well. They own several properties and hold a great deal of equity. Yet as retirement comes closer, many of them find that the wealth they built does not turn into the income they need.
I call this the asset rich, cash poor position. It is rarely caused by a lack of assets. It comes from a gap between the assets someone owns and the income their retirement asks of them.
The strategy that built the wealth
For decades the common property strategy in this country has been simple: invest, hold, and let time do the work. For those who held on through the cycles it has served them well, and their equity shows it.
But that strategy was built for accumulation. The debt was set up for growth. Some properties may have been negatively geared on purpose. None of that was designed to pay the bills once the salary stops.
The difference between equity and income
Equity is ownership value: what a property is worth, less the debt against it. A property worth one million dollars with four hundred thousand owing holds six hundred thousand of equity. That looks impressive on a statement.
But equity does not pay the electricity bill, buy the groceries or fund the trip to see the grandchildren. Retirement runs on income, and a large balance sheet does not always produce much of it.
The retirement shift
During the working years the question is how to grow. As retirement comes closer, the question changes to how to live on what has been built, for as long as it has to last. That shift is where many investors first feel the tension.
Most believe they have two choices. They can sell, which may solve the income problem but shrinks the capital base that took decades to build. Or they can keep holding, which keeps the portfolio but may leave the cash flow where it is. Neither always feels right.
A question worth asking
The question I hear most is this: could the assets be arranged to produce more income, without shrinking the capital base? That usually leads to a closer look at the kind of assets held. Some property suits growth; other property suits income. Both have a place, and the mix someone holds has a lot to do with the cash flow it produces.
The questions I ask
- How much income will your retirement need, after tax, in today's money?
- Which of your assets produce income now, and how much?
- Is your debt set up for accumulation, or for income?
- What happens to your income if you hold everything, sell one, or sell two?
- Where does your super sit, and how does it fit alongside the property?
None of these has a general answer. Each depends on the position in front of us. That is why Position and Pathways is built from your own documents and goals, and sets the routes side by side.
Assets are the vehicle; income is the destination
The point of building a portfolio was never the portfolio itself. It was the life it would pay for later on. Once you can see the difference between wealth on paper and income in practice, the decisions in front of you become clearer. Knowledge does not make the decision for you. It gives you options, and the clarity to choose between them.
Nicholas Lockhart
General information only. No advice is given.