A few articles ago, we discussed the topic of “How much money do I need to save in order to retire.” The most common question we got in response to this blog, was “How do I get there? How do I generate enough money in order to live comfortably throughout my retirement?
So we thought we’d share some ways you may be able to build up your asset levels to get to the magic number of savings you’re wanting to then retire and live off.
How do I calculate this number?
This is a pretty simple equation. Think about the age you’re wanting to retire and then forecast the age you think you’ll pass on to the next life.
Take the difference between those ages and multiply this with an ‘income’ you’re wanting to allow yourself for every year.
Let’s do an example:
Let’s say you want to retire at 70 years old and you forecast that you’ll live until you’re 85 years old. You’d like to give yourself $100,000 to live off each year. The magic number you’d want to save in order to reach this number is $1.5 million. This will ensure that you have enough money per year to live comfortably.
How do I generate this money?
There are several ways to generate wealth through assets and we’ll talk you through a few of them today.
Investing in Property
Investing in property is one of the most common ways to invest your money. The main reasons why people invest in real estate include return on investment (getting returns through the rental yields), market stability (property investment is usually lower risk than investing in shares), and leverage value (using your investment property as security to borrow for another investment mortgage)
Over the past 30 years, the average growth rate of a property in New Zealand has been 6.0% year on year. (CEIC) This means that over the course of ten years, a property is expected to have doubled in value.
It’s a good idea to have a mixture of growth and yield properties. Yield is the annual revenue or rent you get from the property and capital growth is the amount the property goes up in value each year.
Like all investments, there are some risks involved in purchasing properties. We all know buying property, particularly in New Zealand’s current climate, is a big expense. Running into financial hardship and not being able to pay off your mortgage down the track is something to consider, particularly if your investment property is linked in with your house. Make sure you have a good property lawyer and insurance broker who may be able to put safeguards in place if your situation changes.
Investing in shares
When you buy a share, you’re buying a small part of a company and a share in any profit the company makes. You can either buy shares directly or own them through a managed fund such as KiwiSaver.
Shares can rise and fall in value and are better as a long-term investment so you can ride out the ups and downs of the market.
There are many reasons people choose to invest in shares. The most common are that shares usually increase in capital value over time and shares can often offer an income for the shareholder called dividends.
There are many different ways you can invest in the stock market; you can invest in new and upcoming companies, companies that share your values, companies that have a history of steady profit etc. each company you decide to invest in has its own individual set of risks and opportunities.
When it comes to your share portfolio; diversification is important. You don’t want to put all of your eggs into one basket so to speak Diversification can help to manage risk and reduce the volatility of an asset’s price fluctuations.
Trading cards, coins, stamps, comic books etc. can all fetch some very handsome prices. Collecting can be a lot of fun when you’re passionate about it and unlike shares, you can actually enjoy your investment while you wait for your collectibles to appreciate.
The downside to collectibles is that it’s a volatile market that is ruled by the dynamics of supply and demand.
Cutting down on debt
One great way to build wealth is actually by cutting down on debt. Why? Interest rates on debt are much higher than if you put your money into a high yield savings account.
Once you cut down your debt, it can free up a lot of extra money. Let’s take your biggest expense, your mortgage, and use this as an example.
Banks set a standard home loan term at 25-30 years. Why? Because they make money from debt interest. Let’s say you bought a house for $750,000 on a 30-year mortgage. You had an initial deposit of 20% and your interest rate over this 30 year period is 3.5% (fluctuating 0.5% either side over this 30 year period).
If you pay this off in 30 years, the total amount you’d have paid towards this loan would be around $1,031,000.
If you paid this off within half the time (15 years), the total amount you’d pay towards this loan would be $798,000. That’s a difference of $233,000 being paid just towards interest!
The pro to this strategy? There’s no real risk in paying down a mortgage. If you’re the type of person who is risk averse and would rather their money in savings, this strategy is for you.
Keen to try it? Futurebound has an entire course on this subject called Fast Track Your Mortgage where we teach you how to pay down your mortgage within 7-10 years.
Our final tips on the above strategies:
- Don’t put all of your eggs into one basket. In order to build wealth, it’s important to have multiple income streams.
- Remember that there are multiple ways to build wealth within each strategy listed above. It’s not a case of one size fits all, it’s about finding out what best works for you and your current financial situation.
- If you’re unsure of where to start and you need a bit of extra guidance, Futurebound offers financial coaching that is tailored to you. Feel free to book in a quick chat or flick us an email and we’ll set you on the right track.
Keep in mind this article is providing general information and not individual financial advice.
If you’d like a review of your situation and customized advice for building wealth to reach financial freedom and live a fulfilling life, please book a free 15-min chat.