Two Strategies to Fund Your Retirement

Nest Egg vs Golden Goose

By Andrew Nicol, Managing Partner at Opes Partners

Many articles say investors buy rental properties as a nest egg for retirement. But how does it work?

There are two ways you can go about it. They are the “golden goose” and “nest egg” strategies.

Two strategies to retire on real estate

The golden goose strategy is where you own a few rental properties and live off the rent in your twilight years.

Every fortnight, you get rent deposited in your bank account. You then use the rent to fund your lifestyle in retirement. You don’t have to go to work, and money doesn’t run out as long as you have a tenant.

The other option is the nest egg strategy. This is where you own a few properties, and then when you’re ready to retire, you sell one and live off the cash.

Once you’ve spent it, you sell your next property. With this approach, the money runs out at some point. But you don’t need as much wealth to make it work.

Let me tell you two stories to see how these work.

Single mum retires on $79,000 a year 

I first met Tanya when setting up Opes Partners back in 2013. She already had two investment properties she had owned for a decade each.

She was 57 at the time, and like most parents, she had one eye on her two teenage sons. But she also had the other eye on herself.

She wanted to use property to build a passive income. In other words, she wanted to grow a property portfolio so she could live off the rent.

This would mean she could look after herself in retirement. She wouldn’t need to rely on her kids or the government superannuation.

We modelled that if she bought two more properties, she could retire at 65 with a half-decent passive income.

One of the risks of this strategy is property investors often take on massive amounts of debt. They own a few properties and rely on the properties increasing in value to build their wealth.

If you manage your debt and interest rates, you can make good money.

But if you take on more debt than you can handle and interest rates rise, then you can find yourself in a lot of pain.

For Tanya, it worked. Two years ago, she cashed up her four properties and bought two apartments without a mortgage.

Together, these rental properties earn her $79,000 a year. That’s after paying all her costs, like rates, maintenance and insurance.

Without getting out of bed in the morning, Tanya can spend $1500 a week (pre-tax). That’s before factoring in her NZ Superannuation.

As long as she has good tenants, this will continue for the rest of her life. That’s whether she lives to 82, 92 or 102. That’s the golden goose strategy.

Wellington couple set for life

I met Bruce and Carol from Wellington when Bruce was turning 49 and Carol was 46.

They hadn’t invested in property before but had paid off a good chunk of the mortgage on their family home.

They took a different approach to Tanya and used the nest egg strategy.

We worked out if they invested in three properties over the next few years, they could spend $57,000 a year in retirement. They’d use this to top up their superannuation.

But again, this would only work if Bruce and Carol could afford to hold on to these properties.

If they take on more debt than they could handle, they could feel some real mortgage pain.

By the time Bruce hit 65, the value of their properties had gone up, and they’d paid off a bit of debt.

Under the Nest Egg strategy, they sold one of their properties. They cashed out, kept the $57,000 they wanted to spend that year in their account, and invested the rest in a term deposit.

As the term deposits mature, they’ll take another $57,000 out to spend and then reinvest the money for another year.

Bruce and Carol have easy access to money when they need it and don’t have to think about tenants paying their rent. The money is already there in cash.

When they run out of cash, they’ll sell another property and live off the money left after paying off the mortgage.

There are some extra risks and downsides to the nest egg strategy.

First, Bruce and Carol will have to live off the principal of their investment. Not just the interest. So the money will run out at some point.

Secondly, if interest rates fall when they retire, they’ll run out of money sooner than they thought.

How many investment properties do I need to retire?

When I started buying properties at 19, everyone told me you need 10 rentals. According to the logic, that’s what you need to live a comfortable life.

However, it isn’t true, and it doesn’t work today. It’s tough to build a portfolio that big.

From working with hundreds of Kiwi couples, I’ve found three or four properties are usually the sweet spot.

If held for the long term (this is the key), it’ll often create enough wealth for a comfortable retirement.