Building a strong wealth position takes a long-term approach and getting the foundations right during the wealth building and pre-retirement years can lead to a more comfortable lifestyle in retirement.

Tip 1 – Set your investment wealth goal

Firstly, determine the target balance between lifestyle and investment assets in retirement. Lifestyle assets include the family home, which is non-income producing. An allocation that is too far in favour of lifestyle assets in retirement years can lead to being asset rich and cash poor.

Investment assets, on the other hand, are income-producing and include investment properties, shares, managed funds, superannuation and so on. These are the assets that would be relied upon to meet income needs during the retirement years.

The portion in investment wealth should be enough to sustain living costs throughout retirement, which leads to a very common question; how much investment wealth do I need to be able to retire? The answer, of course, depends on your personal circumstances – how long you’ll live, whether you want to preserve your wealth as a legacy to the next generation or use it all during your lifetime, how well invested your money is and how much you plan to spend.

For those wanting to preserve investment wealth, the five per cent rule can be a useful rule of thumb. Using this rule, annual withdrawals that represent a drawdown of five per cent or less of the invested capital tends to be sustainable over the long-term if the invested wealth produces an average annual return of five per cent after inflation. For example, to support an annual income of $100,000 investment wealth of $2,000,000 would be required.

Tip 2 – Build wealth separate to the family home

Repaying the home mortgage during the wealth building years is usually a large focus and an important step toward securing a comfortable lifestyle in retirement. The goal should be for you to be debt free in retirement.

Once the mortgage is less than 50 per cent of the value of the home, consideration could be given to building investment wealth to the target level. While it is important to continue the mortgage reduction strategy, as cashflow allows additional savings should be directed toward investment assets via extra super contributions, investing in a portfolio of shares or an investment property.

This approach should be regular and automated (if possible), tax effective and consider your investment time horizon. It’s a good idea to seek advice on the best ownership structure and investment style.

Tip 3 – Investment wealth should be diversified, liquid and accessible

Consider the return profile of investment assets. For instance, residential property typically provides long-term capital growth with a lower annual income yield. While this may be ok during wealth building years where employment or business income is meeting living costs it can create cashflow problems in retirement.

Diversified investment portfolios tend to be more liquid and accessible allowing for regular and consistent income withdrawals throughout the year. For instance, a $2,000,000 residential property may produce an average rental yield of $60,000 or 3% p.a. before costs and much less after costs. In contrast, a diversified investment portfolio of equities, listed property, fixed interest and cash assets invested with a balanced profile might provide an average annual return of $80,000 or 4.0% p.a. after costs.

Tip 4 – Maximise wealth in superannuation

Finally aim to maximise the amount of wealth in superannuation as it is the most tax effective place for wealth to be invested in retirement. Each individual can have up to $1.9 million in a tax-free pension account.

Building a $1.9 million super balance can be achieved by:

  • maximising concessional contribution opportunities in wealth building years, and
  • transitioning investment wealth held personally or in other structures to superannuation using non-concessional contributions in the lead up to retirement.

Those who have the ability to make maximum use of their allowable tax-free pension cap should not waste the contribution opportunities available to them, if cashflow permits.

Lindzi Caputo is a financial adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696. This article contains general advice which does not consider your particular circumstances. You should seek advice from HLB Mann Judd Wealth Management (NSW) who can consider if the strategies and products are right for you.