Why buying property with super is hard for young and low-income investors

Having recently cracked the ripe old age of 30, it got me to thinking about two things:

1) The fact that I'm getting older, wiser, but somehow worse at being able to handle my drinks!

2) My superannuation account growth.

Today I'll address the second one (the first one probably belongs on some kind of other blog in cyberspace!).

Superannuation is intended to provide us all with our own little nest egg as we finish up working full time later on in life and approach retirement age. When it was first introduced, the Australian populace was lulled into a sense of complacency. The initial sentiment was one of “Ah, fantastic – my employer will kick in 9% every year, and when I hit 65, I’ll be able to sit back, relax, and live comfortably for the rest of my life”.

However, in recent years, people have wised up and realised that 9% kicked in by an employer per year, based on a statistical median salary income (assuming you are working full time for the 47 years between ages 18 and 65, and earning a statistical average income of $65,000 per year – for every year of your working life!), will not last long, upon turning 65. Sure, there are always questions of “But how much money do you really need to live on?” etc. But if you’re like me and have bold life ambitions for your retirement (Touring Antarctica, for example, or helping out in developing countries for months at a time, providing for your children/grandchildren, or even flying into space), you’ll need to give that growing nest egg some serious growth hormones. And by the way, things like flying into space may sound far-fetched, but so you know, all of these are on my bucket list.

Most Australians already know this about superannuation. Most people also know or have heard of self-managed super funds (SMSFs), and understand that finally they can start to take control of where that 9% a year goes, and how it is invested. However, upon recent advice of my accountant (and some trolling of research pieces via good old Google) I discovered a little hitch in the road. And it’s one especially relevant for younger investors. The reality is this: You can’t feasibly invest in property until you reach a “critical mass” in your super account of about $60,000 to $70,000.

if we take an example of an under-30-year-old hoping to unlock her super for property investment; let’s assume she starts on a salary of $35,000 at 18, and this salary grows annually at 4% a year (in line with inflation), all the way up to $53,888.89 at age 29, this means at 9% a year along the way, the near-30 year old’s employer(s) have contributed just $46,331.27 to the fund. Keep in mind this assumes the very unlikely situation that the person has not taken any time off for 12 years! No studying, no part time, no extended stays overseas, etc.

Sure, the funds are being invested and re-invested every year, but they are also being eaten away by fees. So let’s assume that the fund is a good one, and is returning 6% per year, minus just 1% of this for fees etc, so we’ll call it 5% per year. At age 29, this fund would come to approximately $63,804.36.

So, on average salary and assuming non-stop full time work, you’re likely to be about 29 or older before you reach critical mass to self-manage your super fund to a point where property becomes an option.

Pretty sobering, huh?

I am by no means attempting to discredit the institution of superannuation; it was born with the best of intentions. Instead, I’m just trying to paint a realistic picture that yes, even though everyone nowadays knows that they won’t have enough when they retire, and they also know that they can now self-manage their funds, the reality is that you cannot do this from a “younger” age. It’s an older person’s game.

Sure, there are other ways to boost your super to get it to critical-mass level, early on (additional contributions; some of which are incentivised by the federal government to encourage citizens to boost their super, i.e. ‘dollar for dollar’ schemes), salary sacrifice, or requesting your employer deduct a couple more per cent-worth of your salary to your fun, but to really take control, this takes, well, time.

So where do we go from here, then?

Well, developing other investments in life along the way (with your actual income revenue, that is), is the first step. Yes, I’m a property advocate, but your investment does not have to be exclusively property. Still, as you are growing your nest egg with other investment strategies, it could be wise to consider a property funded by your SMSF, at the age of 30 or so, as part of your strategy. Think about it. At 30, you take out a 20- to 30-year mortgage, use your employer’s contribution of 9% annually to help pay it down and cover the running costs, then at the end of the mortgage (retirement age) you cash in, and that little $300,000 to $400,000 property you bought all those years ago would be fully paid off, you sell for ideally triple or quadruple what you paid, and even after fees/taxes are taken out, you’ll have a much healthier nest egg of around $600,000 to 900,000, much better than the $274,000 or so that you would probably end up with if you let the powers that be manage your super for you.

And considering Ashton Kutcher paid Richard Branson about $150,000 to go into space recently, that figure might just be enough for one to live on, and get them into space, too. 

 Cameron McEvoy is a property investor and maintains a blog, Property Spectator.