"My personal preference is for property, largely due to the fact that residential real estate has proven itself to be less volatile than shares or managed funds."
How investing in property through a self-managed super fund can help you retire comfortably
APRA recently revealed that the Australian superannuation industry lost $18.5 billion of its clients’ money in the last financial year.
It’s been a tough year for all types of investments, so let’s look at the returns over the longer term.
They’re not much better.
Apparently the average rate of return from the superannuation industry over the last 15 years (between 1997 and June 2012) was 4.9% a year, and this came with a volatility of 8.4%.
Not a very good return considering that for most of that time you could have invested in government bonds with minimum risk and received a divided of over 5% and the average return from the All Ordinaries accumulation index for the past 15 years has been 7.03% per annum.
A recent Rabobank poll showed that baby boomers are retiring, on average, on about $200,000.
While most folks don’t know how much they need in retirement, it’s generally accepted by the financial planning world that you need around $1 million in retirement to live comfortably.
By the way, I think you need much, much more!
The way planners see it is that, assuming you live in retirement for 15 years with no extra income, $1 million would give you an annual income of around $65,000.
So you can see retiring on $200,000 simply won’t cut it.
Little wonder that more and more baby boomers are looking at taking control of their financial future and setting up self-managed super funds (SMSF).
What’s are our options?
If these facts teach us anything, it is that it’s up to each of us to become financially fluent and take charge of our future.
More baby boomers are setting up their own self-managed super funds and taking their destiny in their hands. Many are investing in shares, but more and more are investing in property. As a matter of fact I have a mixture of both in my super fund.
But my personal preference is for property, largely due to the fact that residential real estate has proven itself to be less volatile than shares or managed funds.
Combining the security of bricks and mortar with the tax office changing superannuation regulations back in 2007 so that people can borrow within their own SMSFs, it is not surprisingly that real estate is becoming an increasingly popular super fund cash cow.
Fact is more and more Australians are recognising the benefits of property as a strong, stable asset base for their super funds, given its ability to generate excellent returns and capital gains over the long term.
Now, not only can you borrow up to 70% (and under certain circumstances even up to 80%) of a property’s value to invest within your SMSF, you can also seek extra funds to make improvements on the residential properties in your SMSF (with some conditions of course and with special emphasis on repair and maintenance versus improvements).
So what are the main advantages and disadvantages of taking this tact when it comes to building your own retirement nest egg?
Of course before you go down the route of setting up your own SMSF, it is critical to seek independent advice from a properly qualified financial planner and to ensure you set up things correctly so you don’t fall afoul of the tax man.
With 5.3 million baby boomers moving transitioning into retirement over the next 15 years or so, I see properties bought in a SMSF as a major driver of property values over the next decade.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.