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Shares v property: which is better for retirement?

An investment with fewer hassles and more income looks the better choice

Should you invest in shares or property? This has been an age-old debate in finance, but retirement can offer a whole new set of issues that need to be addressed.

With constantly altering superannuation laws, Centrelink changes in January and average super balances teetering on inadequate, today’s aspiring retirees have to consider if they’re going to work longer or invest better.

For most people there’s no question about how to invest their super because their fund doesn’t allow for direct property investment, but there’s nothing stopping you investing outside super.

Under super laws there’s only 15% tax on earnings and 10% on capital gains for assets held greater than 12 months.

For retirees over 60 with assets less than the proposed $1.6 million cap, in the pension phase there’s no capital gains tax and no income tax on the earnings received from investments. On the other hand, assets held in your own name will attract taxes as high as 45% plus surcharges.

I must also point out that you can’t touch your super until you’re 60 if you were born after July 1, 1964, so if liquidity is more important that tax breaks then some diversity beyond the super regime may be important. In any case, it’s always good to have assets diversified beyond just one entity for risk management.

Shares offer retirees strong income and low costs: you don’t have to pay a real estate agent, nor are there maintenance costs and land tax bills. But shares can be volatile. What is less volatile is the income produced from shares, and when cash is paying a paltry 2.7%, then a dividend of 6%-7% (for example, the banks and Telstra) looks very attractive.

And dividends tend to grow over time, often in line with the consumer price index, to ensure your income remains stable.

Shares also attract franking credits of up to 30% for tax already paid by the company. If you ordinarily don’t pay any tax, then you can receive tax back, adding to your annual income. For example, if you receive a 5% dividend on a stock that is fully franked, then you can receive an additional 2.14% (or a total of 7.14%) on your money.

I often see investment income from property owners at around 2% or less despite solid growth, but growth doesn’t pay the bills for retirees.

Many of the larger industry super funds now offer direct share ownership so you can own shares in listed companies such as Westfield and Stockland but you can’t own direct property.

These stocks can provide diversity without having to establish an SMSF and deal with its onerous responsibilities and costs.

You’ll need an SMSF to own direct property and, despite the added expense in establishing and running a fund, it can be highly rewarding in a rising property market for the right investor. The right investor is usually someone capable of maximising their super contributions and with a solid, stable and growing income.

If you want to borrow money, you will need a structure called a limited recourse borrowing arrangement, which can add another $1500 or so to costs.

(The tax office has a series of great videos explaining how to manage an SMSF if you need some help.)

Borrowing money magnifies gains but it also magnifies losses when markets turn, and they always turn at some point.

Some investors like the tangibility of property and the potential to use borrowed funds to invest. So, too, many investors like the ease and consistency of share dividends without the hassles of vacancies, high costs and low income that are typical of property ownership, unless you have plenty of money and you can afford the diversity.

I reckon property is a great wealth builder for younger investors but shares provide a stable income in retirement. So for young people with good, stable and growing incomes, property might be a good combination with shares.

But retirees will be better served with higher income and less hassle. Of course, great advice can ensure your strategy is well suited to your personal situation, so chat to an unaligned adviser today to work through a strategy that meets your needs and goals.

Unfortunately growth doesn’t pay the bills for retirees.

Written by Sam Henderson

Sam Henderson

Sam Henderson is CEO of Henderson Maxwell, a boutique accounting and advice firm specialising in SMSF and portfolio management for retirees. He is also the host of Sky News Business’s Your Money Your Call - Retirement.

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  1. My husband and I are late fifties and we have inherited a property that we cant decide whether to sell and invest the money or renovate and use as renter for a while. It is in a prestigious suburb of Brisbane so return should increase nicely over time. However there are sides of the rental market that scare us as well as we have heard some horror stories about tenants.
    Also one of our major concerns over the years which has actually stopped us from investing, is how to find a decent trustworthy financial planner. We had a terrible experience once when almost ready to sign on the dotted line to invest substantial funds, I asked the Planner for his credentials and would he mind if I ran a check on him.. He got very upset with us and said he had never been treated like that before. Needless to say we did not go with him. If they have nothing to hide why would he behave like that?
    I am leaning more towards investing to be honest.

    • Indeed checking up on someone’s credentials should be part of the normal due diligence process in selecting a professional for anything so an over reaction to such a request should be viewed dimly and defensively, as you so reacted.
      Without knowing your full situation, I’d probably keep the property and potentially borrow against it at a 50% loan to value ratio so it pays for itself. I’d do this for diverfisication but of course if you’re retired or close, then perhaps selling and living from the investment income from shares is a lower stress alternative. It also depends upon your income, super levels and capital base, not to mention your work status. Advice would be helpful.

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