Choosing Between Property and Shares for Retirement Income

Insights from Mike Beal, Your Sunshine Coast Financial Advisor

As many individuals retire on the Sunshine Coast, the question of whether to retain property as a source of retirement income frequently arises. Let’s consider a recent case: a single woman with a substantial salary. Despite having a portfolio of debt-free rental properties generating several hundred thousand dollars annually, she faced challenges. The rental income added to her taxable income, pushing her into the highest marginal tax rate, nearly 50%.

Additionally, the low gross yields of around 3% per annum on the properties, before factoring in expenses, resulted in an actual yield of less than 2%. Comparatively, as of December 2023, a diversified portfolio within the superannuation environment offered more favourable prospects. Bonds yielding approximately 6% per annum and Australian shares with a grossed-up dividend yield of around 6% per annum allowed for a yield nearly three times higher than the rental properties. Moreover, the tax burden within superannuation is capped at a maximum rate of 15%, significantly lower than the almost 50% for her outside of superannuation.

Also, consider the ‘hassle factor’ associated with managing a rental property – constant maintenance, tenant turnover, and paperwork. In contrast, shares and bonds within a diversified portfolio provide ongoing dividends or distributions without the associated hassles.

Upon reviewing our analysis, the client concurred, and we are now developing strategies for the tax-efficient sale of specific properties. Since the client will maximise superannuation contributions, we are exploring other tax-efficient investments with substantially lower tax rates than her current marginal tax rate.