How Much Do You Need to Retire?

A typical client comes to us with a range of assets that they accumulated in an ad-hoc fashion over time rather than from the execution of a master plan. Not everyone who is wealthy is financially sophisticated. Often, they were just really good at what they did, whether that was running their construction or earthmoving business or being a great doctor or lawyer.

Most of our clients are not financial experts; if they were they wouldn’t need us. However, they are smart and recognise the importance of seeking the right advice to optimise their position. I’ve had people with tens of millions of dollars asking me if they had enough to retire. As much as it surprises me, it is 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 $250,000 p.a. to meet your expenses in retirement and a typical investment portfolio produces income of 5% p.a., then you’ll need $5,000,000 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 $10,000,000 in capital to generate the income figure of $250,000 p.a.

With regards to dipping into capital in retirement, people tend to fall into two camps; those that are worried about spending any of their capital and those who are more concerned about trying to 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 consider specific circumstances, tax, inflation, and whole range of other variables 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.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Succession

One of the best TV shows I’ve seen in a while is Succession. What the show does really well is explore the issues and power dynamic of a very wealthy family and their business. It highlights how difficult navigating succession within a family business can be. There’s an old adage that family business and wealth is made and lost over 3 generations. The basic concept is that once the wealth is made, the next generation maintains it while the third generation squanders it. Often referred to as ‘shirtsleeves to shirtsleeves in 3 generations’ it’s a cautionary tale that conveys the difficulties families face in managing their wealth and financial success over the very long term. The reality is that planning for succession is a serious topic that is too often neglected until it’s too late. The purpose of succession planning is to make sure that the family wealth passes through the generations and continues to grow. 

There are often tensions as the family patriarch or matriarch gets older, and their adult children rise within the business. It’s important to manage that situation because these issues only become more difficult and more complicated to deal with later if there’s no succession plan in place. By the time the founder passes away it’s all too late. It happens all too often, and the subsequent problems can become an emotional, financial, and legal minefield for the whole family. None of these topics are going to be easy to deal with but it is necessary to work through the issues regardless. 

Addressing these challenges requires careful planning, open and honest communication, and a commitment to the long-term success of the business. Sometimes hard conversations are needed. Seeking external expertise, implementing governance structures, and establishing clear processes can help navigate the difficulties associated with succession planning within a large family business. Obviously, it’s important to avoid any unnecessary bureaucracy but at a certain point, a family grows to a size where it benefits from introducing a more formal process for decision-making than they had in the past. Overwhelmingly, I hear from every family that goes through the process, that they wish they’d done it years earlier.

I had a really great conversation on exactly this topic during my podcast recently with Stu Laundy from Laundy Hotels. These days the family have over 90 venues and a business valued at over $1.5 billion. What was fascinating was Stu’s candour with regard to the real-life struggles that exist within his family as they mapped out the succession plan for the next generation. It’s not easy for the older generation to let go of control and change the way they run the business. What Stu and the family realised and ultimately embraced was that it is critical to have those hard discussions as early as possible because once you do you reap the rewards. So many family businesses can learn from these insights.

You’re not going to avoid conflict in a family business, but you can harness the difficult issues and turn them into a constructive process. These cover a range of topics from the family relationship dynamics, balancing various competencies and skill sets, family Interests, through to the emotional attachment of the founder and how to let go. You also need to ensure fairness and equity for all the family members and the need for the business to evolve and adapt to changing markets and technology. The benefits are significant though and help to safeguard the future prosperity of the business. The planning process helps identify the right people for the right roles and not only educates the successors but develops their talent to ensure a smooth transition and a continuation of the founder’s legacy for generations to come.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Take the trip, see the show

This might be the best advice I have ever given. To be clear, it’s not the best financial advice but it’s not meant to be. This one is about living life. I see this more than you’d think from very wealthy people concerned about spending money in retirement.

Early on in my career I saw many people who worked so hard to build their future. I saw a few couples who sold their business for millions of dollars to retire only for one of them to die within 12 months. Their dreams and plans for the next phase of their lives turned upside down and all the things they were going to do together were never going to be done

What was all that work for? The future they worked so hard for over decades didn’t exist. So, what was the point? It made me more determined than ever to both succeed and enjoy life along the way. It also heavily influenced my views on how to spend money during both your working years and in retirement.

In my younger years, I was more focused on achieving outcomes. I’d reach a goal and instantly move on to the next one. But as I get older, I realise that it’s the process every day as you work towards your goals is what life is all about. The journey is more important than the destination. That journey includes all the simple things in life such as a family meal together or a walk on the beach, but it also includes the bigger ticket items we tend to put off for too long.

But the same applies once we are older too. If you’re 70 you might have 10–15 years of good health left if you are lucky. That’s often the time when you can still travel and do all the things you want to do in life, but it gets more difficult as you get older. Who knows when our time is up too, so there’s no point in waiting to do things, get on with it and do them.

Part of the issue here is that once people have sold their business and retired, regardless of their level of wealth, they become more conscious that the amount of money they have is what they have for the rest of their life. That can make it especially daunting to dip into your capital in the name of fun or living life. But outside of leaving an inheritance, what else is it for? What were all the years of blood, sweat and tears for?

I’m not suggesting people become frivolous spendthrifts, but I am suggesting that it’s worth crunching the numbers, whatever your financial position, to understand the balance between frugality and living a fulfilled life. Of course, success and happiness are different for everyone and only you know what that means for you and your family. But what I do know for sure is that our time on this earth is limited, and our time with our loved ones is even more limited.

When I hear people in retirement questioning whether they should dip into their capital for a regular overseas holiday, I take the view that there is no better time than now. We don’t get healthier as we get older. I see it as money well spent. So, buy the tickets and see the show, take the overseas trip because it might just create some of the greatest times and best memories of your life.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.