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The Simplest Strategy for Retiring Early

The Simplest Strategy for Retiring Early

Getting to a financial position where early retirement is a real possibility is not as difficult as it may seem. There are three key ingredients to being able to retire early; spending less, saving more and starting to invest as soon as possible. What makes early retirement simple is that there is a logical connection between these three ingredients. The less you spend, the more you are able to save and the earlier you can start to invest. But the real magic lies in the fact that the less you spend, the less money you need for retirement. The more modest your standard of living, the sooner you will be able to retire.

An example shows this quite clearly. Let’s assume Peter and Sarah are a couple aged forty. They earn $95,000 after tax between them and they have a mortgage with repayments of $20,000 a year. They can save $15,000 a year which is initially used to pay off their mortgage by the age of fifty. Once mortgage free, they can invest $35,000 a year leaving them $60,000 to live on. By the time they are 65, they will have investments of around $660,000 (at 3% net return); enough to maintain their income in retirement at $60,000 a year, including NZ Superannuation of $30,000 a year.

Now let’s assume Peter and Sarah can save $30,000 year. They are able to pay off their mortgage by the age of 45 after which time they can invest $50,000 a year, leaving them $45,000 to live on.  By the time they are 56, they will have total investments of around $690,000; enough to maintain their income of $45,000 in retirement. By saving more, they have paid off their mortgage much quicker, allowing them to start investing sooner, and to retire earlier. Simple!

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Countdown to Retirement

Countdown to Retirement

The last few years before you stop working are crucial for setting yourself up for a fantastic retirement. They need careful planning to achieve your goals. Of course, with more people now working past the age of 65 it is not always possible to plan towards a specific retirement date. Here are the most important things to do.

  • Plan towards a date after which you will work by choice and if you are able. There is nothing worse than being forced to work late in life by financial necessity. Health problems or lack of employment opportunities may be barriers to work.
  • Adjust your living expenses downwards over the last few years to gradually bring them down to within what you expect your retirement income to be. If you work past your planned date, you can treat the extra income as a bonus to either spend or save.
  • Review your investments to ensure you have liquidity – that is, the ability to get your hands on money when you need it – and to ensure you have put some money aside into growth investments that will keep ahead of inflation and tax over the long term.
  • Review your life insurance cover. By the time you are retired, health insurance and funeral cover are probably the only personal insurance you need.
  • Review your Will and think about preparing Enduring Powers of Attorney so someone else can take care of your affairs later on if required.
  • Get your house in order, literally. Deal with any deferred maintenance on your home and set up a long term schedule of maintenance for the future so you can take this into account in your plans. If you plan to redecorate your house at retirement, remember that it will be need to be done again ten years later!
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Start with Your End Goal

Start with Your End Goal

Throughout life there are various points where key financial decisions need to be made that involve a substantial amount of money or which can take you off on a different path. Aside from the usual ones of buying a first home or starting a family, there are such dilemmas as:

  • Should I leave employment and set up a business?
  • Should I sell my business?
  • Should I undertake a major renovation of my home?
  • Should I buy a bigger, more expensive home?
  • Should I use some of my retirement savings for a big overseas holiday?

Such decisions affect your financial situation now and for years to come. The best way to find the right answer is to start with your end goal. This will be a goal that has a time frame of ten years or more. If you don’t have a ten year goal, develop one. Take your thoughts to a time ten years from now. See yourself on one particular day in that year and imagine all the different aspects of your life on that day. Where are you living? Who are you with? What are you doing during the day? What is your financial situation? and so on. It is only when you have a clear picture of your end goal that you will have clarity around your short term decisions. There are many paths to achieving a goal and you need to decide if you want to take the path that will get you there in the shortest time, or go via the ‘scenic route’ that takes longer but provides more enjoyment along the way. Start with your end goal, then look at the impact on your goal of each key financial decision. Will this get you there faster or with more enjoyment? If not, don’t do it.

 

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An Extraordinary Retirement

An Extraordinary Retirement

Your retirement years should be the best years of your life. With life expectancy increasing, the average person can expect to live to around 90, so retiring at 65 means you will spend over a quarter of your life not working. You can choose for that period of life to be ordinary; or you can choose for it to be extraordinary.

It is said that whatever a child dreams of being when they are about ten years of age reflects their deepest desires for their future adult life and that these desires stay constant in the subconscious mind throughout life, despite the stresses of living. Thinking back to your childhood dreams is a great way to start planning your retirement. Reflect as well on what have been the greatest moments of joy and fulfilment in your life. These may give you clues as to where your future happiness lies. These could include moments of joy in your professional life as well as your personal life. The activities that you absolutely love doing in your personal life are things that you can plan to do more of. Ask yourself these key questions:

  • What is the one most important thing I want to accomplish in this phase of my life?
  • What kind of person do I aspire to be?
  • What do I want to have more of in my life?

There are many people doing extraordinary things in their retirement – setting up philanthropic organisations, developing their talents as artists, musicians or writers, living in another country either as a visitor or a voluntary worker, living a nomadic life in a campervan or on cruise ships, and even giving up on retirement and setting up new businesses or careers. You only get one chance at life, so make the most of it!

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Fear of Missing Out

Fear of Missing Out

There is something about human nature that makes us wired to believe that anything which is scarce or available only for a limited time is something we must have, despite the price. It’s called FOMO – Fear of Missing Out – and it is without doubt the biggest driver of poor financial decisions. Everywhere you look there are examples of selling tactics that prey on our FOMO insecurities.

Advertising copy is the biggest culprit. How many times do you walk past a shop window or read an online advertisement that uses words such as: ‘limited edition’, ‘available for a limited time only’, ‘selling fast’, ‘only a few left in stock’? These descriptors are all designed to tap into our fear of missing out.

This same fear drives people to bid higher at auctions – whether it is an online auction for a pair of shoes on Trade Me, or an auction for a more expensive item such as a car or a house. Rational decisions can go out the window if bidders believe there will never be another pair of shoes, car or house as suitable or affordable as the one they are bidding on. To a rational observer this belief is complete nonsense.

Rapid inflation also drives FOMO. While inflation for most goods and services is now less than 2%, we have had double digit annual increases in property prices, combined with a shortage of real estate listings. For first home buyers in particular, the fear of missing out on their first step on the property ladder has caused many to take on more debt than they are comfortable with.

Financial decisions are best made without fear and emotion. Eliminating fear of missing out is simply a case of believing that in time, you will find what you desire at the right price.

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A Safety Net for Entrepreneurs

A Safety Net for Entrepreneurs

It goes without saying that one of the reasons entrepreneurs are successful at growing wealth is that they are risk takers. Some entrepreneurs argue that in fact there is little risk in what they do, because they fully analyse the financial implications of their wealth-building strategies before they part with their money. Even so, they are betting on their own ability to predict future outcomes accurately. It’s not hard to think of entrepreneurs who have made and lost several fortunes in their lifetime, or who have a list of failed projects alongside those that were successful.

Being on a high growth path to wealth creation can be addictive. When money comes easily, why not keep making more? Cash flow is the life blood of any business and strong cash flow creates the opportunity for expansion. In the extreme, entrepreneurs who rely on cash flow for growth in effect create their own Ponzi scheme. It works well as long as the cash keeps rolling in, but if for any reason the cash dries up, the business quickly collapses like a house of cards.

There is a simple solution for avoiding complete devastation. Every entrepreneur needs a financial safety net – a store of wealth that is ideally unencumbered, and kept separate from the business. Instead of using all the business cash flow to fund expansion, some is diverted into other investments that have a lower risk profile, such as property. This store of wealth can provide a minimum standard of living or a foundation on which to rebuild a business in the event of a failure. For this strategy to be successful, the safe assets need to be protected via legal structures from business creditors and any temptation or pressure to use them to rescue a failing business must be resisted.

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Get Your Full Tax Credit

Get Your Full Tax Credit

There are very few people who, if offered a 50% guaranteed return on their money, would turn it down, particularly with investment returns being so low at present. Yet every June, thousands of people miss such an opportunity by failing to realise that their KiwiSaver contributions are less than what is required to get the full Member Tax Credit. In order to get the full credit of $521, contributions for the year 1 July to 30 June need to be $1,042. Topping up your contributions to that level means that for every dollar you put in, you get a tax credit of fifty cents; a 50% guaranteed return.

This should be of particular interest to you if:

  • You have stopped working temporarily, for example to have a family
  • You work part-time
  • You are paid a low income
  • You are self-employed and not on PAYE
  • You are on PAYE for only some of your income

Member tax credits are paid in July based on contributions up to 30 June. It is important to check every June that you are on track to get your full Member Tax Credit. Usually your KiwiSaver provider will send this information to you. Rather than putting in a lump sum top-up every June, you can make your life simpler by setting up a direct debit to your KiwiSaver fund every month to make up the difference. That way, you don’t have the problem of having to find a lump sum each June. Your total contributions each month should be at least $87. Your regular voluntary contributions can be changed at any time if necessary.

Of course, while you are checking your contributions you should also check that your tax rate is correct and that you have chosen the most appropriate investment option for your funds.

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Fifty and Broke

Fifty and Broke

There is an emerging socio-economic class which I call Fifty and Broke (FAB). FABs are post- babyboomers, from a generation of divorce, serial relationships, corporate restructuring, multiple career changes, consumerism, and increased longevity. Many people suffer at least one crisis during their lives, such as relationship breakdown, redundancy, business failure, bankruptcy, mental health problems or a serious illness such as cancer. Such crises are a test of resilience. Those who are resilient soon bounce back; those who don’t fall behind or never really recover. FABs may have a low level of resilience or may have suffered multiple crises in their lives that would crush even the most resilient of people. They may also be people who have suffered a crisis late in life, leaving them little time or opportunity to recover. They are typically single or in a second relationship, have no savings, do not own a house (or have a big mortgage), have a  low paying job or intermittent work, have health issues and are living from week to week.

FABs face a difficult situation. If depression and stress have not already been present as a factor, they are a likely outcome of being broke. FABs can face a downward spiral where the hopelessness of their situation causes them to lose confidence in themselves and to get stuck in negative thinking, thus lessening their prospects for recovery.

The best way to avoid becoming a FAB is to work on improving your resilience, which is your ability to properly adapt to stress and adversity. The attributes that underpin resilience include:

  • The ability to make realistic plans and to implement them
  • Self confidence
  • Communication and problem-solving skills
  • Emotional self-control.

Being highly resilient will help you bounce back from adverse situations, but even so, sometimes the challenges are just too great.

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Financial Planning for Young Singles

Financial Planning for Young Singles

For young singles with a reasonably good income, life is full of possibilities. There is a lifetime ahead with many choices and opportunities along the way and plenty of time to recover from any mistakes made. However, choice can create uncertainty and confusion. It can be very hard to set goals when there are so many possible opportunities and unknowns. A financial plan is a set of strategies that help you achieve goals and without goals, it is hard to plan.

Rather than attempting to plan when there is so much uncertainty, it is better to focus on getting the fundamentals right so that when your goals become clearer, you are in a great position to move forward.

Know where your money goes. Your aim should be for your outgoings to be less than your income. Set up a budget in four categories – savings, your financial commitments (rent, insurance etc), your living costs (food, phone etc) and your fun money.

Set up an emergency fund. The golden rule of personal finance is ‘always pay yourself first’. Set up an automatic transfer so that every time you get paid, money goes into your savings account – preferably at another bank so it is harder to access!

Stay out of debt. Use your emergency fund for unexpected expenses, not your credit card. Save up for what you want to spend money on. It’s easier to save if you have a clear idea of what you are saving for.

Protect your wealth. Get some basic insurance cover for your personal belongings and to cover health costs or loss of income.

Learn how to invest. Get to understand your KiwiSaver as a way of learning about investment so when the day comes that you have a lot of money you will know what to do!

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Keeping Your Money Clean

Keeping Your Money Clean

Opening a bank account and buying and selling investments are not such simple processes as they were a few years ago. Now you must provide formal photo identification such as a passport or driver’s licence, proof of address, and, if you are transacting a large sum of money, evidence of how you came to have the money. For family trusts, each trustee, including independent or professional trustees, must provide this evidence as well as a copy of the trust deed. While this can seem like an invasive process, especially for elderly investors, it is all for a good cause. New Zealand’s financial system has such a good international reputation that it is a target for criminals wanting to ‘clean’ the proceeds of crime. In the interests of keeping our system clean, financial institutions and financial advisers are required to check identification and source of funds and report suspicious transactions to the Financial Intelligence Unit. Some would say this all seems a bit unnecessary, however each year around 10,000 suspicious transactions are reported. Criminals can go to extreme lengths to clean money, including a process called ‘layering’ where they spread their funds through many small transactions to avoid suspicion. It’s not just hardened criminals who are involved. Think of all those tradespeople who do ‘cashies’ and then spend or invest their money without declaring the income. Tax evasion is just as much a crime as theft or fraud.

Later this year, the range of entities required to comply with anti-money laundering legislation will be extended to include lawyers, accountants, real estate agents and businesses selling big ticket items such as luxury boats. Buying property is a popular choice for criminals – it is estimated that around 30% of money laundering activities are conducted through property transactions. Perhaps that explains our property prices!

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