If your plan is to sleep easy in retirement, then a piece of research we recently came across should be front and centre in your thinking. The Australian Bureau of Statistics looked at average household wealth in the 2017/2018 financial year all around Australia. This kind of comparison is always interesting and provides much food for thought for anyone interested in their financial management. But in this particular piece of research, one finding stood out above all others.
For households with at least one person aged 65 or over, the ABS compared the average household wealth between those that owned their own home and those that did not. The difference was enormous: people who owned their own home outright had average household wealth of $960,000. For households who do not own a home, the average household wealth was just $40,000.
Average household wealth obviously includes the value of any home that you own. People who own homes have much more wealth.
The non-home owning households necessarily include the very poorest Australians. Obviously, really poor people do not own homes. They don’t own very much at all so they will lower the average wealth of any group that includes them. But even allowing for this group, the difference that owning a home makes to the wealth of older Australians is pretty staggering. And if this particular piece of research is any sort of guide, the message is clear: owning a property – or a similar kind of asset – is critical to a comfortable retirement. If you want to sleep easy, it is easiest to do so if you own valuable assets.
There are various reasons why people might not want to buy a property. Most people only ever own one property at a time – the home they live in. So, people who do not yet want to settle down and live in the same place for an extended period might defer buying any property at all. Often, a life event such as a health incident, the loss of a job or a marital separation might mean a home is sold and not replaced. Or a business might lose money and take personal assets with it. Life happens.
The good news is that there is almost always a way available to make things better. Even if buying a property is not on your radar, there are things that you can do to increase your wealth both now and in the future. You might have noted above how we cast the message from the ABS data: owning a property – or a similar kind of asset – is critical in creating wealth.
Property has a lot to recommend it in terms of asset ownership. Usually, it is purchased using some form of debt, and the interest payable on property loans is typically lower than the interest payable on other sorts of loans. This gives buyers the benefit of leverage, where they only need to possess a portion of the purchase price in order to ‘buy’ a home. What they are actually buying is the right to any increase in value in that home. So, if property prices rise, the buyer gets to keep 100% of that rise. As we have seen over the last two decades – and we are already seeing again in 2020 – property prices have tended to rise over time.
This rise tends to be quite general. In fact, ‘successful’ property investment is often not so much about buying the right property as avoiding the wrong property. Most properties have done at least OK over the medium to long term. But some have not. People who avoided the houses that have not done well have, therefore, done well. They have kept all of the general gain in property prices.
But the same logic can be applied to other assets that tend to perform similarly to property over the medium to long-term. These tend to be share-based investments and can either be owned directly or indirectly through a managed fund or – often – a super fund. Indeed, ‘beefing up’ your super can be a great way of managing whatever assets you might have following something like a marital separation. Some people even use the tax benefits of super to save the money they will need to buy a home once they retire.
The important point is not to be discouraged if you or someone you know cannot afford a home. There are many different ways to get to where you want to go, and our experience is that almost everyone can benefit from making some adjustments to their financial management. So, if you are at all worried about your future wealth, please give us a call and get together with us.
If you already have a home, but are worried about losing it, then there are things you can do to minimise that risk as well. What you do depends on where the risk is coming from, so we will not go into too much detail here. But assets like homes can often be protected. Once again, if this is you, then please give us a call to see how we can help. We love to see our clients sleeping easily.