Australia’s financial system - through tax policy, superannuation and retirement benchmarks implicitly assume that retirees own their own homes. Home ownership dramatically changes the amount Australians need to save for retirement.

So, what if you don’t own and rent in retirement? This is an increasingly likely scenario for many Australians given the state of our housing market.

There are structural disadvantages that retired Aussies that rent face. The first step for Australians to improve retirement outcomes is to understand these structural disadvantages and combat them. Mark and Shani run through potential solutions in this episode, and modelling for how to achieve a comfortable retirement.

You can find the full article here.

Shani Jayamanne: All right, so it’s my turn to go on a historical tangent. So when Monopoly was created in the early 1900s, it wasn’t meant to glorify real estate magnets or bankrupt the mates that you were playing with. Or in my case, it was my sister. The original version that was called The Landlord’s Game and it was created by Lizzie Magie. And Lizzie was a writer and an activist and she created the game to criticize the inequality caused by land ownership. And she wanted to show how wealth could concentrate in the hands of a few when property became speculative rather than productive. And the message was supposed to highlight the downsides of a system when most people paid rent to the property owners. And of course, this isn’t how the game has ended up.

The modern game of Monopoly is a celebration of accumulation and whoever ends up with the most property wins. And in a lot of ways, our culture, tax regulations and our societal expectations are really a reflection of this same view of success. A home is meant to provide shelter and stability. And now it’s really just turned into a game where owning property is winning the Aussie dream.

Mark LaMonica: I feel like Lizzie would fit in very well in our current environment in Australia. So obviously a lot of people are struggling to get that little greenhouse on the board. Housing affordability is, I guess we say crisis levels, although it’s been at crisis levels for a while. And that means that there is declining levels of home ownership, especially among younger generations. And those that do have the opportunity to purchase homes are often stretching themselves beyond their limits to make this dream work. So according to Roy Morgan Research, the number of Aussies that are at extreme risk right now is 830,000 of them. So that is a lot. And that is about 17% of mortgage holders. With a quarter of Aussies in some sort of mortgage stress. So the question is, is it worth it? Is property really mandatory to be successful in Australia?

Jayamanne: And I think we both know the answer to this, Mark. But it’s important that we acknowledge that our obsession with property in Australia isn’t unjustified. A recent article in the Australian Financial Review suggested working hard in Australia no longer pays off. It echoed the sentiments that I shared in an article I read a couple of years ago that the tax system really lets you know the best way to build well. The ways homes are taxed is essential in my view. So wealth inequality widens as income and sale of assets are tax less than your working wage.

LaMonica: And decades of policy from negative gearing to the lack of capital gains tax on primary residences is really just entrenching this view and broadening this gap by rewarding those who managed to get their foot on the property ladder. And for many Aussies, property has also been their most successful investment. Homeowners have watched their equity grow over decades of price appreciation, supported by a combination of strong demand, population growth, and relatively low interest rates. So we do like statistics on here, Shani, especially you. I think you’re a little more into them than me.

So why don’t we turn to core logic? So Australian home values have risen by more than 400% since the early 1990s. Adding the benefits of gearing and the tax benefits that property receive, both primary residence and investment property, makes a return that ends up in people’s pockets from housing even larger. So really for older generations, it’s cemented this view of property where it has this reputation as the safest, and surest way to build wealth.

Jayamanne: So we see this narrative emerging and that is that owning property is mandatory to achieve financial success in Australia. And this really causes stress for many younger people who don’t believe property ownership is financially feasible.

LaMonica: So ASFA, the Association of Superannuation Funds of Australia, produces the most widely used benchmarks for a retirement living standard. So the latest figures estimate that for a comfortable retirement, a couple needs $72,663 a year and an individual needs $51,630. The assumption for these models is that a property is fully owned in both scenarios. So when you don’t own a home, the required income to support retirement rises substantially, often by more than 40%, according to the Gratton Institute. Renters don’t just need higher savings to fund their housing costs, but they also face greater uncertainty about long-term tenure and affordability.

Jayamanne: And this assumption highlights a structural problem. Our retirement system is built on the expectation of home ownership. Superannuation balances, age pension eligibility and retirement cost estimates all really hinge on that. And we’re just waiting for the system to catch up and recognize the changing asset mix of a rising number of Australians that are unable to afford property or people retiring with mortgage balances.

LaMonica: And we both believe that you can be financially successful without a property, hopefully for me since I don’t own a property, but you’re fine, of course, Shani. But what that does is it requires redefining what success looks like. So home ownership is not just a financial tick box. It also has a lot of practical advantages that come with it. So it’s a symbol of independence. You’re not at the whim of your landlord for security. It’s a symbol of financial freedom as well because paying off your mortgage gets rid of what’s typically your largest expense, housing. And it opens up so many different options for you to direct your cashflow elsewhere.

Jayamanne: And it is such a widely held belief that the ASFA retirement standards dictates that you must own your own home to have a comfortable retirement and a modest lifestyle is afforded to renters. Property prices are now more than nine times the average income in Sydney and Melbourne. So this key to success is out of reach for a lot of us without substantial help or sacrifice. And I think at a certain point, the real and symbolic advantages of property ownership are less clear even for people that manage to get a foothold on the property ladder.

LaMonica: So the question, of course, is how can financial independence and freedom be achieved through other means? So it can mean being in control of your finances instead of being in mortgage stress like so many Australians are. It means building wealth sustainably and having the freedom to make choices that align with your life goals. It could also mean building a diversified investment portfolio instead of having your wealth concentrated in a single asset that might never be realized through a sale. It could mean prioritizing flexibility like living closer to work, traveling or having freedom with career choices. And it could mean having more liquidity, which can also give you peace of mind.

Jayamanne: And we all know where this is going. The key to achieving financial security without a home is to invest. The tax code is tilted in favor of owning assets over labor. To build wealth, we do need to lean into the system. The tax system may discriminate between property owners and renters, but compounding and time doesn’t. The key is building other assets that offset what property ownership would have provided and using assets and structures that have their own tax advantages.

LaMonica: So the first thing we need to do is we need to dig in a little bit on why owning your home is so powerful in retirement. And then we can try to mimic some of those different attributes that it has. So one of the biggest reasons property has retained a privileged position in Australia’s wealth landscape is the CGT exemption for your primary residence. There are no taxes when you sell your home. So if you invested the same amount in shares or ETFs and later sold them for a profit, you would pay tax on half the gain at your marginal tax rate if you held them for more than a year.

Jayamanne: So this exemption has two major effects on how Australians build and hold wealth. And this is the challenge for those that don’t have a property. The first is that it encourages people to channel savings into property as a tax effective investment. And the second is that it shapes retirement planning as the family home is also exempt from the age pension assets test. You can live in a $4 million home and still qualify for the full age pension, but you may have $1 million in super and see your entitlement reduced. So structurally, the system rewards home ownership in retirement. A fully owned home provides stability in later years and dramatically lowers living costs. So how do you recreate this Mark?

LaMonica: Do you want me to complain about that age pension exemption or?

Jayamanne: You can if you like.

LaMonica: Just going to recreate it.

Jayamanne: Do you want this to be a 40 minute episode?

LaMonica: No, no, we will we’ll skip that. So there is one approach that hits both of those points. So taking advantage of a vehicle where you also have exemption to capital gains taxes and that is superannuation in the pension phase. So combined with the tax advantages during accumulation, super is an attractive vehicle to build wealth. One way to do this is using superannuation as a tax effective vehicle to build wealth and then purchase a property with a lump sum in retirement, which does give you security and structure best to maximize superannuation and the age pension entitlements.

Jayamanne: And I think importantly, the best path of action for any individual is the one that involves choice. Renters need to consider that they will need a few things. So the first is a higher superannuation balance to offset future housing costs. You do this by maximizing your contributions to your super to take advantage of it as a tax effective vehicle. You invest in the right asset allocation, maximizing the time that you have until retirement, invest in aggressive assets through super to enjoy the lower tax rate on capital gains and income that will compound over time.

LaMonica: And the other part of this is you get to enjoy and take advantage of the low cost of maintaining other assets. So housing is great in a lot of ways, and it certainly is the answer for some people, but you can’t deny that it’s really, really expensive. When you think about all those frictional costs, the maintenance costs, the loan costs for many that are mandatory when you have to go out there and purchase a home. So equities can be accessed for low fees with little to no maintenance costs. And that can make them really efficient and pay off over the long run. And the last point here is including housing costs in your retirement plan. And that is including allowing for rising costs because housing costs will not remain stagnant, especially over decades.

Jayamanne: All right, let’s get to the juicy bit. So how much do you actually need? Let’s run through a few scenarios. The first is that you need to have your home fully paid off. This means that you only need to fund lifestyle expenses. Your annual spend is around $50,000. And those are ASFA figures for a comfortable retirement. Although withdrawal rates vary in retirement, we assume a 4% withdrawal rate and a 4% real return. So the required starting balance is $1.25 million. Let’s say you retire with a mortgage. You retire with $270,000 left on your mortgage, a 6% interest rate, 10 years remaining and annual repayments of around $26,000. So let’s say that you pay off your mortgage immediately with your retirement savings when you get access to your super. You need $177 a month from the age of 30 to make up for not retiring with a mortgage fully paid off. Then you rent in retirement. The Aussie capital city median for a unit is $550 per week. So that’s $28,600 per year. And that’s inflation at 2.5%. You’re trying to provide for a 30 year retirement in all scenarios. So if you are 30 years old, the additional amount you need to save is $467 a month.

LaMonica: Okay, we actually modeled this out for everyone because that was a lot of numbers. Yes. So you did the modeling, but it is clear that there is a gap. So a retiree who owns their home outright only needs to fund their lifestyle expenses using a real return. So real returns on top of inflation. So real return of 4% and a 30 year retirement that requires around $1.25 million in super. A figure that lines up with what ASFA considers as a comfortable lifestyle once housing costs are removed. We can debate the definition of comfortable, but that does at least meet that ASFA standard.

Jayamanne: And if you’re still paying a mortgage, your financial needs change materially. A retiree with $270,000 in their mortgage balance at age 67 will need that amount in retirement if they’re looking to pay off their balance immediately using superannuation funds. The toss up here is whether these additional funds should be directed towards your mortgage in the first place. The key considerations here would be the hurdle rate, which compares the effectiveness of contributing funds to your mortgage versus the net return received from investing. Superannuation has a lower hurdle rate than most investments as the tax rates are lower. Hurdle rates are individual to your circumstances and we’ve got some information on how to calculate yours in the original article, which is in the episode notes.

LaMonica: And then if you rent throughout your retirement, the gap widens further with today’s capital city rent levels, you need $715,000 more than a homeowner to enjoy that same standard of living. So these obviously are not small differences and they do meaningfully alter how much you need to save throughout your working life. So as Shani said before, for a 30 year old, if you go into retirement with the mortgage, you need to save $177 extra a month. If you are going in to retirement and you plan on renting the whole time, you need to save $467 more a month. So for those that are of course closer to retirement, those numbers go up. You need to save more.

Jayamanne: And really, it’s not all bad news. Renters have the luxury of moving around. They can make lifestyle changes based on preference or career requirements. They don’t have maintenance costs that are often large and lumpy and your wealth can be diversified across many assets. If you want to access funds to go on a holiday, you can liquidate part of your portfolio. You cannot sell part of your house. The value of a house may continue to increase, but that is irrelevant if you never sell it.

LaMonica: And the key here is that there is a lot that’s out of your control when it comes to purchasing a house. There’s not much you can obviously do about housing prices. You can’t simply earn more or come into some lump sum to make purchasing a home work. But you can try to mimic the reasons why property is so powerful and super is key to this. So consciously plan within the system and be comfortable with the knowledge that your path to financial comfort looks different, but you can still definitely get there. So not all doom and gloom for renters like me.

Jayamanne: No.

LaMonica: That is good news. Alright, thank you guys very much for listening. We really appreciate it.

Here are a few more resources for investors looking to understand how much they should have in their superannuation:

Buying a home out of reach? Try these financial goals instead. Shani runs through a framework to get the most out of life and your financial goals if you’re not sure where to start. She runs through the most common financial goals that investors have.

How much should I have in my super? Avoid using the ‘average balance’ tables that superfunds put out. There are better ways to understand how much you need without using comparisons.

Estimate the savings you need to retire. Use the Morningstar retirement model to come up with a retirement plan that estimates the amount you need to retire and the variables that will impact future outcomes.

4 steps to calculate how much you need to retire. This step-by-step process can help you estimate the size of the portfolio needed to support your dream retirement.

Why I’ve chosen to rent for life. Mark speaks about how even though he can afford to buy a home, he has decided not to. He runs through his reasons for why.

Does buying a house stack up financially? Buying a house offers stability and a sense of community. But are you buying for these reasons? Or could your money work harder in other ways?

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