Ask Paul: Should I keep scraping by until retirement?

David feels like he's scraping by, but what if he doesn't need to at all? A closer look at his numbers changes everything.

Reader question

Hi Paul,

I'm 59 years old and own my home outright. I also have an investment property in Hobart worth about $520,000, with a weekly rental income of $470 and a loan of $235,000.

As far as my debts go, I'm paying back a $253,000 loan on a second investment property, which is located in Western Australia. I have no other loans or debts to repay.

In the current property market, the investment property in Western Australia is worth about $820,000 and brings in a weekly rent of $650.

I have a superannuation balance of $400,000.

I work full time and earn a salary of $54,000 a year, but will usually work a few hours of overtime each week. I live alone and have no dependants.

Money is tight and I'm driving an older car, which is only worth about $5000.

I would love to know if you have any advice to help me achieve some degree of financial freedom. At the moment, I'm living week to week, but in an ideal world I would be in a position to retire in two or five years' time. And a newer car would be nice.

Should I keep struggling along as I am until I retire, or would it be a good idea to sell one of the investment properties and be debt-free until I reach that stage of my life?

I hope you have some advice and see a way forward for me. - David

Paul's response

Well, David, my first thought was about how you have come to hold one property in Hobart and one in WA. I presume you lived in both these locations, but you certainly have two investment properties about as far apart as possible.

Add your super into the mix and you have built a solid pool of investment assets. Let's take a look at this.

Your total gross assets are a very impressive $1,740,000. Deduct your debt of $488,000 and we get to your net assets, not including your car, of some $1.25 million. Of course, to this we would need to add the value of your home.

Doing the sums

From a cashflow viewpoint, I can see your problem with free cash.

The Hobart property is returning $470 a week, or about $25,000 a year. I'll guess the interest on your mortgage is $15,000. I think the remaining $10,000 will be absorbed by agent fees, insurance, rates, maintenance and all the usual costs of a property.

I'm going to assume a zero income return to you from this property.

Your WA property is returning $650 a week, or about $48,000 a year. Your interest on the loan of $253,000 I'll assume is some $34,000.

Here I am hoping you have some positive cashflow, but I doubt it is much. From the $14,000 that remains you have the same expenses as above, and a nearly identical mortgage amount. I'm thinking a surplus of maybe $4000 a year.

You'll clear about $45,000 from your salary, plus my guess at a surplus on your WA property, so after tax you will have about $48,000.

Not bad, but hardly a fortune.

Now I can see why money is tight and a better car unaffordable. My question to you is why?

With your fully owned home and net investment assets of $1.25 million, if you did not work at all, spread across a balanced portfolio, you could expect to earn about 8% a year on average over the long term. If you spent 5%, leaving the other 3% to keep pace with inflation, you'd have a bit over $60,000 to spend.

Obviously your age is important in regard to accessing super, but you have ample assets outside super.

My view is you are sacrificing lifestyle today to create arguably more wealth than you need in the future. I don't know your personal situation, but if you keep struggling to get by day to day and keep your $5000 car, you will die a very rich man with a very old car.

There may be personal reasons I don't know for you to scrimp and save today to have more wealth in the future. But based on what you have told me, I don't see the logic here.

Clearly you are living on your after-tax income, plus a bit from the WA property, totalling about $48,000. You have a pool of assets that, if you stop work, will deliver more than this.

I'm arguing that in all likelihood you are already financially independent.

I suspect you want to keep working. Your after-tax income will cover most of your costs. In your shoes, these facts would lead me to a simple conclusion.

I most certainly would not struggle until retirement.

I would be looking at the two properties and selling the one with the least upside and the lowest capital gains tax liability. I don't know your purchase price of each property, but let's say you sell Hobart.

After agent fees, this should clear some $275,000. Work out your CGT tax with your accountant. But you would have a very nice pot of money.

Focus on today

It sounds like you will work to retirement age, so I'd be buying a new car, taking a holiday and enjoying a few meals out with a nice, cold beer.

You should still have $200,000 left over. You can leave some in the bank and invest some in shares. The dividends would be some $7000. I'd improve my lifestyle by spending that without any guilt.

In fact, I'd happily run down the $200,000 up to my retirement.

You will still have money going into super. Your existing $400,000 will grow over the longer term. The property you keep, if well located, should grow in value and deliver increased rent.

You already own your home.

The caveat here is what I don't know about your situation. Please see a professional adviser if there is complexity that I know nothing about.

On the face of what you have told me though, scrimping and saving when you seem to have already covered your retirement income seems nuts to me.

I can say one thing with absolute confidence. There are no guarantees about how long we live. I've had five close mates from university die in their 50s and mid-60s in the past few years.

Sure, it is prudent to create wealth for retirement, but if you have already achieved this, which I suspect you have, it is time to focus on today.

You have worked and saved hard. Have some fun.

As I have said to Money readers for about 40 years, aiming to be the richest person in the graveyard is a silly plan.

What to read next

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• How much super you need for a comfortable retirement now
• Why one-off financial advice is so hard to get

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