Future Focus: How much do you need for retirement if you don’t own a home?
Is a comfortable retirement possible without owning your own home?
When Monopoly was created in the early 1900s, it wasn’t meant to glorify real estate magnates and bankrupting your mates (or sister, in my case). The original version was called The Landlord’s Game and was created by Lizzie Magie. Lizzie was a writer and activist, and she created the game to criticize the inequality caused by land ownership.
Lizzie wanted to show how wealth could concentrate in the hands of the few when property became speculative rather than productive. The message was supposed to highlight the downsides of a system when most people paid rent to the property owners.
The modern game of Monopoly is a celebration of accumulation. Whoever ends up with the most property wins. In many ways, our culture, tax regulations, and societal expectations reflect this same view of success. A dwelling meant to provide shelter and stability has turned into a game where owning property is ‘winning’ the Australian dream.
People are struggling to get their proverbial little green houses on the board in a country where housing affordability is at crisis levels causing declining home ownership rates among younger generations. Those that have the opportunity to purchase are often stretching themselves beyond their limits to make this dream work. It’s worth asking the question – is property really mandatory to be successful in Australia?
Our obsession with property isn’t unjustified
A recent article in the Australian Financial Review suggested working hard in Australia no longer pays off. It echoed the sentiments I shared in my article about wealth building signals from the tax code. The way homes are taxed is central to my view. Wealth inequality widens as income and sale of assets are taxed less than working wages.
Decades of policies from negative gearing to the lack of capital gains tax (CGT) on primary residences entrenches this broadening gap by rewarding those who manage to get their foot on the ladder.
For many Australians, property has also been their most successful investment. Homeowners have watched their equity grow over decades of price appreciation supported by a combination of strong demand, population growth and relatively low interest rates. According to CoreLogic, Australian home values have risen by more than 400% since the early 1990s. Adding the benefits of gearing and the tax benefits that property receives – both primary residence and investment – makes the return that ends up in people’s pockets from housing even larger. For older generations, this has cemented property’s reputation as the safest and surest way to build wealth.
This narrative has emerged that owning property is mandatory to achieve financial success in Australia. This causes stress for many younger people who don’t believe property ownership is financially feasible.
The Association of Superannuation Funds of Australia (ASFA) produces the most widely used benchmarks for retirement living standards. The latest figures estimate that for a comfortable retirement a couple needs $72,663 a year and an individual $51,630. The assumption is that a property is fully owned in both scenarios.
When you don’t own a home, the required income to support retirement rises substantially – often by more than 40% (the Grattan Institute). Renters not only need higher savings to fund their housing costs but also face greater uncertainty about long-term tenure and affordability.
This assumption highlights a structural problem – our retirement system is build on the expectation of homeownership. Superannuation balances, Age Pension eligibility and retirement cost estimates all hinge on that. The system is yet to recognise the changing asset mix of a rising number of Australians that are unable to afford property or people retiring with mortgage balances.
Can you be financially successful without property?
The answer is yes but to do so requires redefining what ‘success’ looks like.
Home ownership is not just a financial tick box - it is also a symbol where the practical advantages of owning your own home take on more meaning. It is a symbol of independence as you are not at the whim of your landlord for security. It is a symbol of financial freedom – paying off your mortgage gets rid of what is typically your largest expense. .
It is such a widely held belief that the ASFA Retirement Standards dictates that you must own your home to have a comfortable lifestyle in retirement, with a ‘modest’ lifestyle afforded to renters.
Property prices are now more than nine times the average income in Sydney and Melbourne, so this key to ‘success’ is out of reach for many without substantial help or sacrifice. At a certain price the real and symbolic advantages of property ownership are less clear even for people that managed to get a foothold on the property ladder.
Financial independence and freedom can be achieved through other means. It can mean being in control of your finances instead of in mortgage stress, building wealth sustainably and having the freedom to make choices that align with your life goals.
This could mean building a diversified investment portfolio instead of having your wealth concentrated in a single asset that might never be realised through a sale. It could mean prioritising flexibility like living closer to work, travelling or having freedom with career choices. It could mean having liquidity for peace of mind.
The key to achieving financial security without a home is to invest. The tax code is tilted in favour of owning assets over labour. To build wealth, individuals must use this system. The tax system may discriminate between property owners and renters but compounding and time doesn’t. The key is building other assets that offset what property ownership would have provided and using assets and structures that have their own tax advantages.
Why housing is so powerful in retirement
One of the biggest reasons property has retained a privileged position in Australia’s wealth landscape is the CGT exemption for your primary residence. There are no taxes when you sell your home. If you invested the same amount in shares or ETFs and later sold them for a profit, you’d pay tax on half the gain at your marginal tax rate if you held them for more than a year.
This exemption has two major effects on how Australians build and hold wealth, and this is the challenge for those that do not have a property:
- It encourages people to channel savings into property as a tax-effective investment
- It shapes retirement planning as the family home is also exempt from Age Pension assets tests. You can live in a $4 million home and still qualify for the full Age Pension, but you may have $1 million in super and see your entitlement reduced.
Structurally, the system rewards homeownership in retirement. A fully owned home provides stability in later years and dramatically lowers living costs.
So how do you recreate this?
There is one approach that hits both of those points - taking advantage of a vehicle where you are also CGT exempt – superannuation in the pension phase. Combined with the tax advantages during accumulation super is an attractive vehicle to build wealth.
Some use superannuation as a tax effective vehicle to build wealth and then purchase a property with a lump sum in retirement to give themselves security, and structure best to maximise their superannuation and Age Pension entitlements.
The best path of action for any individual is one that involves choice. Renters need to consider that they will need:
- Higher superannuation balances to offset future housing costs.
- Maximise your contributions to superannuation and take advantage of it as a tax effective vehicle.
- Invest in the right asset allocation, maximising the time you have until retirement. Invest in aggressive assets through superannuation to enjoy the lower tax rate on capital gains and income that will compound over time.
- Enjoy and take advantage of the low cost to maintain other assets.
- Housing might be the answer for some, but it is an expensive endeavour to maintain. Equities can be accessed for low fees with little to no maintenance costs. Being efficient here will pay off in the long run.
- Include housing costs in your retirement plan, including allowing for rising costs.
How much do you actually need?
Let’s run through a few scenarios.
Home fully paid off
If you retire with your home fully paid off, you only need to fund lifestyle expenses. Your annual spend is around $50,000 (ASFA’s figures for a comfortable retirement). Although withdrawal rates vary in retirement, we assume a 4% withdrawal rate, and a 4% real return. The required starting balance is $1.25 million.
Retire with mortgage
You retire with $270,000 left on the mortgage, 6% interest rate, 10-year remaining term and annual repayments of around $36,000.
You rent in retirement
You rent in retirement. The Australian capital city median for a unit is $550 per week ($28,600 per year) inflating at 2.5%.
You’re trying to provide for a 30-year retirement in all scenarios. If you are 30 years old, the additional amount to save is included in the last column.
When we model these scenarios, the gap becomes clear.
A retiree who owns their home outright only needs to fund their lifestyle expenses. Using a real return of 4% and a 30-year retirement, that requires around $1.25 million in super – a figure that lines up with what ASFA considers as a ‘comfortable’ lifestyle once housing costs are removed.
If you are still paying a mortgage, your financial needs change materially. A retiree with a $270,000 mortgage balance at age 67 will need that amount in retirement if they are looking to pay off their balance immediately using superannuation funds.
The toss up here is whether these additional funds should be directed towards your mortgage in the first place. The key considerations here would be the hurdle rate, which compares the effectiveness of contributing funds to your mortgage vs. the net return received from investing. Superannuation has a lower hurdle rate than most investments, as the tax rates are lower. Hurdle rates are individual to your circumstances – Mark has written on how to calculate yours here.
If you rent throughout your retirement, the gap widens further. With today’s capital-city rent levels, you need $715,000 more than a homeowner to enjoy the same standard of living.
These aren’t small differences, and they meaningfully alter how much you need to save throughout your working life. For a 30-year-old, it is $177 a month and $467 a month respectively. For those closer to retirement, that figure will be much higher.
It is not all bad news. Renters have the luxury of moving around. They can make lifestyle changes based on preference or career requirements. They don’t have maintenance costs that are often large and lumpy. Your wealth can be diversified across many assets. If you want to access funds to go on a holiday, you can liquidate part of your portfolio. You cannot sell part of a house. The value of a house may continue to increase, but that is irrelevant if you never sell it.
The key to success is more conscious planning with a system that isn’t designed around these circumstances. It just means that your path to financial comfort looks different.
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