Luke Jensen March 29, 2025 - 12 min read

What’s the best investment for retirement income?

We compare property investment and a diversified portfolio of liquid assets.

As you approach retirement, making informed investment choices is essential to ensure a steady stream of income that supports your desired lifestyle. Two popular investment options are direct property investment and a diversified portfolio of liquid assets, commonly associated with superannuation retirement savings. Each comes with its own set of return features, benefits, and potential downfalls. In this article, we will explore the differences between these investment options, with a focus on why a diversified portfolio of liquid assets might be a more favourable choice for generating retirement income.

Direct Property Investment

Return Features:

  • Rental Income: Property investment provides rental income, which can be a stable source of cash flow.
  • Capital Appreciation: Over the long term, properties may appreciate in value, potentially providing capital gains over the longer term.
  • Tax Benefits: Investors may benefit from tax deductions on mortgage interest, property taxes, and depreciation.

Benefits:

  • Tangible Asset: Property is a physical asset that investors can see and manage.
  • Inflation Hedge: Real estate can act as a hedge against inflation, as property values and rents typically increase over time.
  • Leverage: Investors can use borrowed funds to purchase property, potentially amplifying returns.

Downfalls:

  • Illiquidity: Real estate is not easily sold, making it difficult to access funds quickly when needed.
  • Tenant Management: Managing tenants can be time-consuming and stressful, involving maintenance, rent collection, and potential vacancies.
  • Loss of / reduction in Income: In the event of vacancies, or a period between tenants, income can cease, resulting in a direct impact to retirement income and lifestyle where rents received are relied on to fund retirement living expenses.
  • Capital Expenses and Maintenance:-  Physical assets typically require ongoing maintenance and upkeep. Capital outlays for items such as replacing carpets, painting, kitchen and/or bathroom replacement are required from time to time to ensure the asset remains valuable and leasable. This maintenance and upkeep can result in large expenses over time as well as periods of vacancy resulting in loss of income.
  • Capital Gains Tax: Selling property can result in significant capital gains tax liabilities, which can reduce overall returns.
  • Market Risk: Property values can be affected by local market conditions, economic downturns, and changes in interest rates.

 

Diversified Portfolio of Liquid Assets

Return Features:

  • Dividend Income: Equities in a diversified portfolio can provide dividend income, which adds to the overall return.
  • Interest Income: Bonds and fixed-income securities generate interest income, offering a stable cash flow.
  • Capital Appreciation: Diversified portfolios have the potential for capital appreciation through market growth.
  • Tax Efficiency: Certain investment vehicles and strategies can enhance tax efficiency and minimize tax liabilities.

Benefits:

  • Liquidity: Liquid assets, such as stocks and bonds, can be easily bought and sold, providing quick access to funds when needed.
  • Diversification: Spreading investments across various asset classes reduces risk and enhances portfolio stability.
  • Professional Management: Investors can benefit from professional management and advice, which can improve investment outcomes.
  • Flexibility: Liquid assets offer flexibility to adjust investment strategies based on changing market conditions and personal financial goals.

Downfalls:

  • Market Volatility: Stock and bond markets can be volatile, leading to fluctuations in portfolio value.
  • Lower Leverage: Compared to property investment, leverage is less commonly used in liquid asset investments.

Case Study: Comparing a direct property investment and a diversified portfolio scenario

Imagine two investors, Alex and Jamie, both approaching retirement with $500,000 to invest.

Alex decides to invest in a rental property worth $500,000. Over the next 10 years, Alex receives an annual rental income of $15,000 (3% yield) net of fees and experiences a capital appreciation of 3% per year, bringing the property value to approximately $671,000. After selling the property, Alex incurs capital gains tax, reducing the net proceeds.

Jamie chooses to invest in a diversified portfolio of liquid assets, comprising 60% equities and 40% bonds. Over the same 10-year period, Jamie’s portfolio generates an average annual return of 6%, (net of fees) resulting in a portfolio value of approximately $895,000. Jamie benefits from dividend and interest income, liquidity, and the ability to rebalance the portfolio in response to market changes.

Analysis

Returns:

  • Alex’s Property Investment: $500,000 initial investment grows to $671,000 (3% annual appreciation) plus $150,000 in net rental income, less capital gains tax.
  • Jamie’s Diversified Portfolio: $500,000 initial investment grows to $895,000 (6% annual return) plus dividend and interest income, with potential tax efficiency.

Liquidity:

  • Alex: Limited liquidity, difficulty accessing funds quickly.
  • Jamie: High liquidity, easy access to funds when needed.

Management:

  • Alex: Ongoing tenant management, property maintenance, and potential vacancies.
  • Jamie: Professional management, low-maintenance investment.

Flexibility:

  • Alex: Limited flexibility in adjusting investment.
  • Jamie: High flexibility to adjust investment strategy based on market conditions.

Risk:

  • Alex: Exposed to local market risks and tenant-related issues.
  • Jamie: Diversified risk across various asset classes and markets.

Conclusion

While direct property investment offers tangible assets and potential rental income, it comes with significant downsides such as illiquidity, tenant management challenges, and capital gains tax liabilities. On the other hand, a diversified portfolio of liquid assets provides higher liquidity, professional management, diversification, and flexibility, making it a more favourable choice for generating retirement income.

It’s important to seek professional financial advice from experts like Propel Financial Advice to tailor your investment strategy to your individual needs and goals. By working with a financial advisor, you can ensure that your investment decisions align with your current and long-term objectives, helping you achieve a secure and comfortable retirement.

Feel free to contact us at Propel Financial Advice for personalised financial planning and investment strategies that align with your unique needs.