The power of a property portfolio for retirement

Planning for retirement is a crucial financial NEED, and one of the key decisions retirees face is how to allocate their investments to ensure a stable and dependable income. Two commonly considered investment classes are property and equity portfolios. This article will explore the potential of a property portfolio to provide retirement income and stability compared to an equity portfolio, using real financial data from 2014 to 2023.

As an X financial advisor and leader of numerous IFA businesses I am a big believer in diversification but also the need for consistency, certainty and security, especially in retirement years.

Intro

Let's consider 2014 starting portfolios worth ￡1,000,000 each with NO debt/leverage attached, one invested in an FTSE 100 tracker (equity) and the other in a portfolio of UK buy to let properties . We will compare their performances over ten years, taking into account both capital growth and income generation.

The Mechanics of Equity and Property Investments

Equity Portfolio (FTSE 100 Tracker)

An equity portfolio comprising a FTSE 100 tracker grows in value by the average total return of FTSE 100, which includes both dividends and capital appreciation. Investors typically withdraw a proportion of the portfolio value annually for income. In this example we are taking 5% as our income withdraw per year which is fairly standard in the market.

Year-by-Year Equity Portfolio Breakdown:

Property Portfolio

A property portfolio benefits from rental income and capital appreciation. The value of the portfolio increases annually as house prices increase across the country, and rental yields provide a steady income stream also increasing year on year.

Income calculated as a 4% nett fixed per annum based on property values

Year-by-Year Property Portfolio Breakdown:

Comparative Analysis

Income Generation

• Over ten years, the property portfolio generated steadily increasing rental income, starting from ￡40,000 in 2014 to approximately ￡68,885 in 2023 totalling ￡518,482.26 This consistent growth of income can provide retirees with a reliable income stream that increases over time.
• The equity portfolio's annual withdrawals varied based on a fixed 5% of the portfolio value, which showed more fluctuation due to market volatility. Withdrawals ranged from about ￡38,000 to ￡50,000 per year.

Capital Growth

• The property portfolio's value grew from ￡1,000,000 in 2014 to approximately ￡1,682,625 by 2023. This capital appreciation aligns with average UK house price growth rates over the decade.
• In comparison, the equity portfolio ended with a value of approximately ￡858,278 in 2023, experiencing significant year-to-year volatility. The overall growth is less stable compared to the steadily appreciating property market.

Stability and Risk

Property Portfolio

• Properties provide a tangible asset and tend to be less volatile compared to equities. The nature of property means it often retains intrinsic value and can provide a hedge against inflation.
• Rental income often grows consistently with rising property values, aligning well with long-term financial stability for retirees.

Equity Portfolio

• Equities, while potentially offering high returns, come with higher volatility and risk. Market downturns, like those in 2018 and 2020, significantly impact the value and income derived from equities.
• The equity market's unpredictability can be unsettling for retirees depending on stable income.
• Equities however have the benefit of being liquid meaning that when needed, for whatever reason, access to cash is simple and fas.

The Bottom Line

For retirees prioritizing a stable and increasing income, along with asset appreciation, the property portfolio demonstrates a strong ability to deliver consistent rental income and capital growth with less year-to-year volatility.

In contrast, an equity portfolio, while offering the potential for high returns, comes with risks of volatility and income fluctuation, which could be challenging for those needing dependable retirement income. That said in its favor when you need to access larger amounts the portfolio would be somewhat more liquid.

Both asset classes have their merits, but the steady growth and stability of a property portfolio make it a compelling option for those seeking reliable retirement income and wealth preservation.

When planning for retirement, understanding the behavior and potential of different asset classes is crucial. A well-diversified portfolio SHOULD include both equities and property, balancing the growth potential of stocks with the stability and steady income provided by property investments.

If you wish to find out more about how to build a debt free portfolio for your long term retirement goals or you are in the process of allocating capital for retirement feel free to get in touch.

Thanks for reading

Greg