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Wealth
Over almost 15 years as an Investment Adviser, I have worked with many clients who have created substantial wealth through property. Property can be an effective long-term investment, but wealth tied up in a small number of properties does not always provide the flexibility required in retirement.
A client can appear financially secure on paper while still struggling to produce reliable cash flow for travel, lifestyle expenses and future healthcare.
The client situation
In this case, a couple approaching retirement owned several residential and commercial properties. Their net worth was strong, but most of their wealth was concentrated in property.
Rental income varied, maintenance costs were increasing, and accessing capital generally required additional borrowing or the sale of an entire property. The couple wanted to retire and travel while they were still active. They also wanted to reduce the amount of time spent managing tenants, repairs and property related administration.
Identifying information, values and some circumstances have been changed to protect confidentiality.
What mattered most
The couple wanted to:
The issue was not whether property had been a good investment. It had been very successful for them. The question was whether the existing structure remained appropriate for retirement.
Our approach
We modelled several options. These included retaining every property, selling selected properties gradually, reducing debt and moving part of the proceeds into a diversified investment portfolio.
The agreed strategy involved a staged transition rather than an immediate sale of everything.
This allowed the couple to consider market conditions, taxation, property specific factors and their emotional connection to particular assets.
Proceeds from selected property sales were allocated across three retirement buckets. The short-term bucket funded regular drawings, travel and foreseeable major expenses. The medium-term bucket provided greater stability and could replenish the short-term allocation during appropriate market conditions. The long-term bucket remained invested with a greater emphasis on growth.
Because several years of spending were separated from the growth portfolio, the couple did not need to sell long-term assets each time markets declined.
Our investment philosophy in practice
Diversification is not about rejecting an asset that has performed well. It is about avoiding unnecessary dependence on one asset class, location, tenant, industry or economic outcome.
Liquidity also has value.
A diversified portfolio can allow clients to access smaller amounts of capital without selling an entire property. We modelled a flexible drawdown range of approximately 3 to 5 per cent, depending on investment performance, other income, inflation, planned expenditure and the couple’s desire to preserve capital.
We also considered the three phases of retirement. The active years were expected to involve higher spending on travel and experiences. Spending was likely to moderate during the slower years. A separate allowance remained available for the support and healthcare years.
Guidelines were established around annual drawings, cash reserves, portfolio values and future major expenditure.
The outcome
The couple moved from being property rich but relatively cash flow constrained to having a more flexible and diversified retirement strategy. They reduced their property management responsibilities, improved access to capital and gained confidence to spend more during their active retirement years.
They still retained property exposure, but it no longer carried the full responsibility for funding their retirement.
What I have learned
An asset that helped create wealth does not necessarily need to remain the centre of the retirement strategy forever. The transition from building wealth to using wealth often requires a different structure.
In retirement, flexibility, liquidity, diversification and ease of management become increasingly important. The goal is not simply to maximise the value of the estate. It is to ensure the capital can support the life the clients want to live.
At Yovich & Co, we help clients turn accumulated wealth into retirement choice.
Jarrod Goodall
FSP198885
