Thursday, May 18, 2006

Newsletter May 2006

How much do I need to retire comfortably?

The answer

The answer depends on your lifestyle, and how long you will live.

But in general, the answer is – WHATEVER YOU ARE EARNING NOW.

Let’s look at it like this – right now, you have access to resources that pay you a return – your wages – in the order of 5%. This is an average return on any investment, don’t you agree.

So the value of those resources that you have access to today is 20 times your wages (5% times 20 equals 100).

So if you’re earning $60,000 today, you have access to a pool of resources worth $1,200,000 yielding 5%.

When you retire, and if you want to continue with your current lifestyle, you’ll need to replace those resources – your boss’s – with your own.

Explanation in detail

Let’s just say you are a person of good health on an average income, say $60,000, and you are retiring today.

To simple truth is that, for the next 5 to 8 years, you’re life style won’t change all that much. The reason is that you have your house paid off, the kids have left home, so whatever expenses you have today will continue on. Except that you’ll have more time to spend it.

And what exactly is the cost of your lifestyle? For most of us it’s our income – in this example $60,000 – because we don’t save a penny. (Well, except for the compulsory 9% super contribution – i.e. $5,400 of this $60,000 income).

So you may need an income something like $55,000 to enjoy your retirement.

You may be surprised at where the money goes – but don’t you spend $200+ each week on food - at the supermarket, the fruit shop, the butcher and the wine cellar?

And the occasional take-away meal from the pizza shop, the chicken shop or the Chinese or Indian restaurant?

Then all those household bills – property insurance, council rates and water rates, gas, electricity, phones (how many mobiles in your family?) as well as cable TV and tollways. And you call the plumber and the electrician occasionally. Put down $100 per week.

What about clothing, and bedding and household items – say $2500 pa i.e. $50 per week?

Then there’s entertainment – going to the movies, to the footie, to a restaurant or live theatre – and when you add in the train or taxi fare (or at least the fees at the parking station) statistics show that pre-retirement we spend $100 per week.

What about cars? Fuel, registration, tyres, maintenance, insurance comes to $100 per week. (I’ll ignore any thought of the cost of a replacement vehicle).

And we should allocate something for holidays – let’s pencil in $30 per week so that we know that we can budget $1500 a year for a modest holiday.

But don’t forget about wellbeing and health. There’s compulsory private health insurance (and we certainly don’t want to drop that in retirement, do we?) doctors, dentists, chiro, prescriptions at the chemist and a few bottles of vitamin pills – chalk up $3,000 a year – say $60 per week.

Then there celebrations – weddings, grandchildren’s birthdays – so we should think about $20 per week for this.

Did I mention hobbies – even simple pleasures like gardening cost money. Crafts cost money too. As does lawn bowls. How many times during a year would you go to a hardware store? Put down $3,000 for the year or let’s say $60 per week.

Now these expenses are just for Mr. and Mrs. Average. Remember the kids have left home and you got rid of the mortgage years ago.

But still these expenses – go on, count them – come to $820 per week.

That’s right - $820 per week. Which is $42,640 p.a.

So you’ll need an income of something like $55,000 in retirement to be able to continue with your current lifestyle. You’ll pay some income tax, and you’ll have enough left over.

So – to retire comfortably, you’ll need a big pool of assets out there.

If these assets yield say 5%, then to receive an annual income off them of $55,000, you’ll need a pool of assets with a value of $1,100,000.

So that’s the answer to your question “How much do I need to retire comfortably?”

     

Now it may be too late for you to create all that, but if you can do one investment property today, and then another in the not too distant future, you’ll be so much better off.

There will be (some) capital appreciation, and you may have to sell one to fund the continuing debt servicing on the second (which you’ll keep.)

I say this because most of us will have some super, so live off that until it’s exhausted (my rationale here is that’s a financial asset that will depreciate in purchasing power) and let whatever remaining property assets you have go through at least another property cycle.

Why you must act TODAY!

Very few people are aware of the Law of Compounding (sometimes referred to as the Law of Increasing Returns) but it is one of the most powerful investment tools available.

In simple terms, this Law proposes that the longer you hold an investment, the later years compound upon themselves at a greater rate than the early years.

So if you have 15 years to go, and defer the start of your investment portfolio for one year, the result would be that you would lose the benefits of financial compounding in the 15th investment year!

The best that you can hope for is to obtain the benefits in your 14th investment year, which – according to the Law of Compounding – is always less.

Which is why you have to start TODAY! You can’t defer “until the situation is better”.

So now you know why I call this strategy “Impossibly Easy”.

Packaging your investment

As you know, if you want to proceed further, I co-ordinate the whole process so that you will be at peace with your first investment property, and then subsequent ones.

My role is to conduct you through the whole investment process and the packaging includes, in particular:

 the Special Report and the educational modules
 financial analysis with the focus on your goals
 selection of the certified property (that will attract high quality long stay tenants, in a growth suburb as well as your exit strategy),
 funding to suit your circumstances (not the bank’s)
 the legals (the purchase contract, the ownership structure, the necessary updates to your will, both enduring powers of attorney etc.)
 maximum possible depreciation deductions
 accountancy support (including the 15/15 lodgment)
 the quantity surveyor’s report
 tenant selection and on-going management.
 all necessary insurance policies

In conclusion

Phew! That’s enough for now. But let me know if you want me to help you explore your options further.


Bernard Kelly 0414 778 518