By David Chaston
What is your biggest asset?
Buying a house. Actually, buying your first house, which is usually considered the largest financial transaction of your life.
Rising house prices in some major urban centres can turn that decision into one of your best performing investments. (Although those gains are almost always the result of some pretty dodgy local authority regulation restricting housing supply, so you would be unwise to count on it.)
But this column wants you to reconsider this standard real estate industry narrative.
In a low interest rate environment you can buy a more expensive house for your fortnightly repayment. But really, you are just buying the same house but for more money.
Actually, I reckon your biggest (and best) asset is your earning capacity.
Especially when interest rates are low.
It also raises an important 'retirement income' issue.
Think of it like this:
The median income for a 30-34 year old is $52,096 per year, gross.
You can get a 4% gross interest return on a term deposit.
If that interest was worth $52,096, you would need a TD worth $1,302,400 to earn that level of income.
So your job is worth $1,302,400.
And that is probably a lot more than your house is worth, or likely to be worth in current dollar terms when you retire.
It's simple maths when interest rates are 4% - you need 25 times your required income as a capital sum.
KiwiSaver doesn't come into it when you are retired because you won't be having those deductions then. But it will definitely help you get to your target.
When you retire you will need both; a house and an income. So you don't have the option to sell the house to release the cash so you can invest, because you will still need somewhere to live.
Ah, you say. But I will get NZ Super when I retire. Correct (so long you believe John Key).
A single person living alone gets $410.32 gross per week, or $21,337 per year. That's the same as having a TD worth $533,400 at 4%.
A couple living together get $620.68 gross per week, or $32,275 per year, and the same as having $806,885 term deposit at 4%.
Therefore you will actually need the $1,302,400 less the equivalent of NZ Super (less $533,400 or less $806,885 depending on your circumstances) - that is $769,000 or $495,515 as your savings if you want to live on a similar income sourced from a term deposit.
It's a big target.
You should start now if you haven't already.
KiwiSaver can be a part of that (so long as you don't raid it to buy a house), but it is clear that it will only be a small part of that goal.
Let's progress the example on the basis that you are 30 and earning a median income of $52,096 per year gross.
You will have 35 more years of earnings ahead of you. If we assume pay rises keep you up with inflation, we will look at everything from here on out in 2013 dollars.
35 years of $52,096 per year means you will earn $1,823,360 gross from now till you retire. If you make 3% KiwiSaver contributions and your employer makes 3% (before Employer Superannuation Contribution Tax), your contributions into KiwiSaver will amount to $99,280. Even after your KiwiSaver earnings are added, it is clear that this will be far less than you require - you will be $400,000 short in today's dollars unless you do a lot more than KiwiSaver.
What are your options?
Firstly you should invest in your income, to get a better paying job. That will always be the best option but only if you don't fritter away those extra earnings. A higher paying job won't help if all you do is spend the extra earnings. But it will give you the opportunity if you take it.
Secondly, as a 30 year old, consider taking some additional risk for long term gains. Talk to an adviser about getting out of conservative or default KiwiSaver funds.
Thirdly, plan to work longer than to age 65. Your income is likely your biggest asset. Therefore you need to be doing a job you like and are good at if you want to stay employed past 65.
And don't forget you need to plan to live at least 30 years after 65. Current data shows that people dying now lived 20 years after 65, but when you get to that age it is likely average death rates will have extended out at least seven years.
In anyone's assessment, 30 years for retirement will require a long-term investment strategy. Perhaps converting your nest egg to fixed interest when you get to 65 is not a good plan. A renewed bout of inflation will quickly leave you in penury right at the time you can least do anything about it. Who knows what the economic situation will be like in 60+ years (your 35 of remaining working life plus your 30 years of 'retirement').
The one thing from all this is that it is a daunting prospect. But it won't be any less daunting if you ignore planning for it. You could win Lotto, but most people won't.
You do have a huge asset in your wages or salary ($1,823,360) so only three things will make a real difference. Work at growing those earnings, save an increasing proportion of them, and have those savings work harder by taking on some sensible risk.
Learn what you can about money and investing so that when you talk to a qualified adviser you be clearer about what you want to achieve and can judge the wisdom of what they recommend.
53 Comments
Work past 65? Why not look at working less years rather than more. It is easy to achieve with some planning. Live below your means, invest a large proprtion of your salary (50%+)and retire 20-30 years before everyone else. http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
Even someone starting with $0 at age 30 could be retired before 50 with a little bit of effort. What you rather have: a shiny new car and a latte every day or 20 extra years of retirement while your health is good?
Ha! another kiwi MMM fan here. The formula works - I'm a wage slave about to retire comfortably @ age 55 (probably should have done it earlier) thanks to lifelong good habits.
Friends are like "how the f.... did you do that?". As you say - it's easy to achieve with a little thought.
Best one liner I ever learnt: "Pay yourself first". Meaning, from each pay packet, first do the investing you need to do to make your future plans work out. Then construct today's lifestyle from what's left over. But you already know that.
Welcome grum. There are a few of us about in NZ stuggling against the high cost of living but coming out on top. There is a good mustachian guest post up today on this site.
I know what you mean about others not understanding. I try not to tell people how much I have or save each month as they don't believe it is possible. I once took a year off work and travelled because I could and everybody was saying "I wish I could do that" as if it was hard. Can't wait to see their faces when I turn up one day and tell them I am retiring and then they realise they've got another 20+ years :)
Greetings grum and kiwimm, make that another MMM fan. 48 and being retired for the last few months. Was already on a early retirement trajectory when I came across MMM a coupe of years ago. It helped clarify things and also act as a support network knowing that there were other people on the same road. Not a subject that I can talk about with too many people because they think you're either nuts, won lotto or inherited vast sums. But as we know, and as you pointed out kiwimm, it's just maths.
Hehe. I always find it amusing when people (like Von below) think you will have nothing to do when you retire early. They assume that you will sit round the house all day scratching bodyparts.
Congrats neili on your new found freedom to pursue everything you want to do without the shackles of an employer.
I tried it out on a couple of mates who I knew could handle it - I'm thinking of quitting my job soon, discuss. Their reaction: but but my job is part of who I am, it defines me, etc. My question, if you had all day to do anything you wanted, is the best you can come up with to go and sit in a glass box for 8 hours?
Great, thoughtful article David. Thank you.
Kiwimm, I think after paying off the student loan, buying or renting an overpriced house, oh yes and bringing up children, 95% of 30-34 year olds (including this one) can't even think about saving even 10% of their income for the foreseeable future and this will come home to roost. I think many of us will be working till we are 75. I certainly plan on doing so.
I'm 35, have two pre-school kids and overpriced rent yet manage to save 40% of my income. It can be done if you are sufficiently motivated, make good choices and are not suckered in my the marketing machine. On current projections, I will retire art 45.
I own no property and will not at these prices as it is cheaper to rent. I can afford to wait for prices to move downwards or can move outside of Auckland when retired.
Incidentally, Kiwisaver is of little value to me as that cannot be accessed until I am 65. I only put in as much as my employer will match and will consider the income a bonus when I reach that age.
I hope you have a really, really good "retirement plan" and I am not talking about a monetary one. What on earth are you going to do if you "retire" at 45 for around 40 years assuming you will have good health and live to 85. It could be very, very boring existence unless you have absolute millions of dollars to enjoy life as well as continuing to pay for your children's upbringing etc. I retired 6 years ago from permanent work (at age 60) because my health would not allow me to continue working fulltime, but I have casual work still around 10 days per month. I find I have to be very disciplined in planning each day and do find heaps of things to do because I have hobbies and sport and community work but if you don't have a "living" plan you will be in trouble my friend.
Fear not. When I say retirement I mean that I will no longer have to work for money. I will probably choose to do some consulting work, start a business, learn new practical skills, build/renovate a house, play with the kids, volunteer or all of the above. Retirement gives me the freedom.
Agree, coming from a two (not bad) incomes, with avaerage size mortgage, two cars (both secondhand 6+ yrs old), daycare fees, insurance (all sorts), daily living costs, extortion council rates.. we would be extremely lucky to save 5% of our net incomes. Our big break came when we sold off our (slighly) overvalued home in Auckland and move across the ditch with a smaller home and smaller mortgage.. Now single income + a bit of saving.. life is reasonably comfortable and not bad weather..
17% compulsory employer contribution + 7% employee super scheme is helping a big way!
I won't go into too much detail on a public forum but my total for non-discretionary bills per year (incl all supermarket spending but excl rent) is $18,000. Rent is a further $20,000 and discretionary spending is $12,000 for a total of $50,000
$110,000 household income will give you $85,000 after tax and kiwisaver (no benefits). Saving the $35,000 gives you a saving rate of 41%. Assuming a 6% return on investment, this is enough for you to retire after 20 years if you don't inflate your lifestyle.
Biggest saving is not having any debts, cycling/walking to work so only running one old car for 6000kms a year and cooking my own food.
Hi Kiwimm,
I don't understand your figures. Do you live in a 3 bedroom house in Auckland for $385pw and you and your wife be able to walk to work? If you have 2 preschoolers the cheapest daycare if you are both working fulltime is $200pw each. A total of $17600 assuming you both take 4 weeks off each non currently, Spending $250 pw on Supermarket shopping gives you $13000, plus $100pm of Phone/rent, plus $200 insurance plus 200 pm on electricty, gives me $21400. I make that $39000 plus $20000 plus $12000 for a total of $71000, so a savings rate of 16% which is on the generous side for you. So I think it is possbile to save that much only if you have a) cheap housing and b) free childcare. Not two things many people have acess to. So maybe it's not so easy after all? I'd also add these are figues get blown out if you are paying the current going rate for housing.
All of our costs are significantly less than yours quoted above e.g. weekly shopping is $150/week. We pay market rates for housing - we have no need for a 3 bed house. Better to live smaller and closer to work. Childcare is our biggest cost after rent. My wife works part-time and grandparents help out 1d/week to keep this down. Roll on the school years.
I guess my point is, you are stating in your 1st post that a couple both on the median wage should be be more than capable of saving 30/40% of thier wages for retirement. I don't believe in this day and age that is possible. People our age cannot expect ANY pension and 95% of us have much higher fixed costs than you. It's not just about saying people shouldn't be suckered in buying cars etc. For the average 30 something is not in your fortunate position. BTW I think this situation is very wrong and we should be furious that it's taken this long to address the housing problem. And the question should be why our generation can't expect a sensibly priced house to rasie the next generation of Kiwi's? If you are on an average wage shouldn't you expectto afford an average house?
kiwimm, AUS super is compulsory and you can't opt out. You can select Self Managed option but it is under strict reporting regime. It can mount up very quicky.. For me, by the time it reaches 3yr the amount saved is enough to buy a luxury German car! not that I will buy one but it's much better than kiwisaver I had back home.
Given that the underwrite will not be there by the time you retire, your investments will be worth a lot less than the current conventional-wisdom forecast would have you believe. However a percentage of a lot (AU super) is better than a percentage of a little (Kiwisaver) so relatively you will be better off.
I would also expect that in the event of the financial model falling off a cliff, you would be able to raid your super (if only to pay back the banks)
Chairman - well, cash may, just may, be tradeable. Electronic proxy will crash - nothing surer. There's too much of it expecting too litte stuff even now.
Sure, someone may wrest it off you, but having the means to live in real terms, rather that via paying someone for the means to live, might just be the less-vulnerable way to go.
ok, fair enough, but:
1. I don't pay too much attention on gloom and doom predictions, I might as well ive in a hole if i do
2. As I said before, working across the ditch - super is complusory. Yes I'd much rather have the money.. if you know how to get around that let me know.
1 - it's a common, but flawed, mental strategy to attach an emotion to something, them use that to dismiss it. Who said what I wrote was 'doom and gloom'? I said it was fact, which is neither.
2. Yes, I am well past 'getting around that' - so are lots of folk. Transition Towns, time-banking, reducing/reusing/recycling, de-cluttering, downsizing, poweringdown.
That Aussie super won't be available; as with all future bets, the support ain't there. It probably extended the pretend, though; in the same way a firm going down the gurgler often starts to sell it's employees shares as part of their wages - shares in something about to become worthless.
Back in the 70's I was given some advice at odds with David's very sensible piece. Get a job in London, preferably with a financial company offering employee loans at concessionary rates. Buy the biggest house you can service the mortgage on. Trade up in value every 5-7 years depending on circumstances until you are in your mid 50's. Then sell up and move to a comfortable mortgage free house sufficient for your needs with a surplus nest egg - and likely not in London. Simple, and for many who followed it - it worked. I wasn't one of them - I couldn't believe house price inflation would last and I found large debts too uncomfortable. I also thought of a house as a home to live in, not a wealth creation vehicle. However though I wouldn't choose to live in Auckland I can see parallels here and even if such paper wealth is truly illusory, then there seem to be many living very well as a result - urban and rural. World population doubled since then and might have something to do with shelter and space needs growing! Anyway I'm not 30 so now I choose a modified version of PDK's self sufficiency formula.
However it is dressed up, that 17% is coming out of your pay. If your employer didn't have to put it into your super, he could pay it to you direct and then you could decide for yourself whether you wanted to put it into super saving. When the Aussie super scheme was introduced it was made quite explicit that the employer contribution was instead of, rather than on top of, an increase in wages.
How then is the Australian super scheme per se making you better off? If you want to put upwards of 20% of your total income into super saving, as you are doing now, you were free to do so under KiwiSaver.
No, the reason you are better off now is not because of the difference in approach to super saving. It is that you are earning a higher total remuneration, and spending less of it on housing, than you did in NZ.
The important point to note is that pension management fees will exact a terrible price on the positive returns available to the fund over time. And worse when the returns turn negative. The inadequately analysed impact of slippage on the return outcomes is next to disastrous. Disclosures of such costs need to be declared at the outset for each potential superannuitant saver.
The costs of maintaining layers upon layers of people employed to service the superannuation industry is a story that needs to be told. Leeches of no discernible value.
I should know - indirectly I was one of them. No talent prop trading industry pro, retired at 45. Fund managers just marked up our prices and passed the net cost on to the client's A/C in addition to the annual management fee. Obviously the reverse upon position exit.
You're not following my point.
A certain percentage of your total remuneration is going into your superannuation. Whatever the superficial optics of how that percentage is divided between you and your employer, the reality is that it's all coming out of your take-home pay.
Yes, it's compulsory. That means you don't have a choice. I don't see that as being better than having a choice.
Certainly, some people like to have everything organised for them as if they were helpless infants incapable of self-control. But that's not a particularly good reason why things should be organised to allow and encourage them to remain helpless, at the expense of those who are prepared to take on responsibility for themselves.
From 1 July, you will be able to transfer your Super to Kiwisaver when returning to NZ. If you then emigrate to a country that is not Australia, you can withdraw your money (except tax credits). See here: http://www.kiwisaver.govt.nz/already/get-money/early/moving/
I don't agree with this reasoning. If everyone in Aus got 17% extra pay, then everyone could, theoretically, afford to pay 17% more for houses and other goods and services. Then no one, except for a few disciplined and/or very high earners, would be able to save and/or invest.
Taking 17% (actually 14.5%, if you're pedantic like I am) out of everyone's take-home pay to go into super will benefit the country in the long term as a whole. Otherwise, most of it will be consumed in the short term. Individuals have plenty of choice for what to do with the other 83% (85.5% for pedants).
Davidl, just curious, as I have a school age child. Do you consider your student loan a good investment? I'm not judging, but I have a sneaking suspicion that much higher education is more about the success of the educational institution than it is about success of the student.
Remember interest rates will not always be 5% to borrow and 4% less tax to save.
Sometime before 65 you could easily be paying 11% on the mortgage and receive 8% less tax from the bank so the only way is to invest somewhere other than the bank. What therefore? From current price levels rising interest rates could be an embarassing burden on your capital.
It may be useful to be an only child with well off parents who die young enough for you to enjoy the proceeds and leave just enough to your children to cause them to think you are a good bet.
;o)
What this article misses completely, is that we have reached the point where capital can't make capital any more. Actually, it never did, the ever-increasing supply of underwrite did the magic, and it's just been knobbled.
The vast majority still project the 'value' of the desired item(s) to the (worthless in it's own right) proxy called money. David is no exception; happily adds in 4% interest, but fails to identify the 4% growth in everything involved in the physical supply of 'stuff'.
As Kiwimm says, don't bet on a nest-egg being available or 'worth' as much, 20 or 30 years hence. Better to have in hand, to wherewithall to support oneself. That eliminates all the middle-folk and supply vagaries you can't control. If you're self-sufficient in food, water and shelter, that only leaves medical, rates, and discretionary spend. Far better than a digital representation of a 1 followed by several zero's in some overseas-owned computer. Quality of life is a valid q too; what's the point in spending your best years in an office or whatever, to fund your worst years?. Keeping healthy and 'working' less might be a better strategy; the older I get, the more I see contemporaries having rolled that dice and lost.
It's mentality. Save first and live on whats left over. Or spend first and save whats left over. Get your mind into the former. The rest will work out.
Then there is the real losers mentality. It's all hard. So don't do anything. Big capital L stamped on the forehead for that one.
I have to disagree with parts of David's article - specifically "Firstly you should invest in your income, to get a better paying job."
I think that's terrible advice. Working for someone else is unlikely to provide you with a meanigful existence, let alone the money to service that existence.
If you want to get ahead financially you really need your own business. Yes, I know it's hard, and many of them fail. But the rewards both emotionally and financially can be large. I encourage anyone to consider starting their own business.
And to the person that is worried about being bored in retirement...well, very sad for you really. Says a lot about how society has changed for the worse and people have lost their way and forgotten what life's all about.
End of sermon!
I am about to retire at 58. I started buying shares 30 years ago and have accumulated shares that pay ever increasing dividends. I have made mistakes but who hasn't. Live within your income and throw as much as you can at equities that have monopolies or good consistant income streams. The advantage of shares are that you do not have to rely on people paying you rent and there are no expensive assets to maintain.
David, you're looking at this backwards!
Firstly of course you should buy some farmland which is destined to be rezoned so that you can make a $100m+ profit within 20 years! But seriosusly, I must make a correction. David you incorrectly assume that a person works forever with your valuation! Of course someone working 30 years at $52,000pa only has a net present worth of about $920,000 assuming 4% interest rates. Now, consider the fact that if you could own an asset that produced a 20% return then you're valuing half of your waking life at just $260,000 even at a 15% return you are valuing your working life at just $347,000. The first house that I bought earned 30% pa from the rent alone, plus over the past 12 years has grown in value by an average 22% pa. Saving money at term deposit rates is a slow boat to nowhere, income assets are the key to economic independence.Others have noted NZ's overwhelming dependence on debt greater than our wealth to achieve your type of return outcome - every investment that grows greater than nominal GDP currently (2.33% P.A.) does so on the back of a ponzi scheme. Read whole article
hmm, I think I understand the sentiment you are trying to communicate, but really, if you were running your own business that needed employees, would this be your view of them???
My experience through several JOBs has been very different to what you suggest. No victim mentality here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.