A typical client comes to us with a range of assets that they accumulated in an ad-hoc fashion over time rather than from executing a master plan. Not everyone who is wealthy is financially sophisticated; often they were just really good at what they did. They are usually just really good at running their construction or earth moving business or they’re great doctors or lawyers.
Most of our clients are not financial experts; they wouldn’t need us if they were, but they are smart, and they know the value of getting the right advice to help them optimise their position. I once had a client with $10m ask me if they had enough to retire. As much as it surprised me, it was a great reminder that everyone worries about the same types of things when it comes to retirement:
· How much do we need to retire?
· Do we have enough to retire?
· How long will my money last?
There is not one simple answer because everyone’s situation is different, but these are easy questions to address. In financial terms, the three questions above are all a variation of the same equation, the basic variables of which are income, expenses and capital.
But for the purpose of the general concept, simple numbers are the best place to start. If you require income of $100,000 p.a. to meet your expenses in retirement and a typical investment portfolio produces income of 4% p.a., then you’ll need $2,500,000 in capital.
If you have more capital than this then you’ll be fine. If you have less capital than this then you have a decision to make, and you can either reduce your expenses or you can deplete your capital. There is no right or wrong answer it is up to you. But you need to understand the numbers.
I can’t emphasise enough how important it is to understand the context here and the impact of even the most basic variables. If we change the assumption for the typical investment portfolio in the scenario above to, say, 2.5% p.a., then you’ll need $4,000,000 in capital to generate the income figure of $100,000 p.a.
With regards to dipping into capital in retirement, people tend to fall into two camps; those that are petrified of spending any of their capital and those who are petrified that they won’t use it all before they die. My philosophy here takes into account real life, not just the financial side. When you’re 65 maybe you live for another 30 years, maybe you live for 2. But I’ll say this, life is short, and I have not yet seen anyone get healthier and more active as they got older.
The reality is that your first 10 years of retirement are going to be your best, so make the most of it. If you are 65 and have $3,000,000 in capital and you spent $50,000 from your capital to have an amazing holiday every year for 10 years does it matter that at 75 your capital has reduced to $2,500,000? Probably not. What if you don’t make it to age 75?
Obviously, the above scenarios are basic and don’t take into account specific circumstances, but the overriding concepts and philosophy still apply. For our clients we complete sophisticated financial models that include a range of assumptions around returns, inflation, tax structures and scenario planning to ensure they are prepared for the future and have peace of mind. Certainly, if the three questions at the start are keeping you up at night then it’s probably time to get that type of advice and start planning properly.