By Elizabeth Kerr
There was once an era where you started work in an entry level position worked your way up through the organisation and eventually tipped out near the top and into retirement.
Your income grew as your jobs increased in seniority. It wasn’t discussed; it was just the way it was.
People under you looked forward to the day you announced you would be leaving so that they could jump into your spot. You didn’t discuss with anyone whether you wanted to retire or not it was just what you did once you reached that age. You were sent out to pasture regardless of how many racing years you still had in you for a life of walking the fairway or planting roses.
The perception was that you had done your time and now you deserved the quiet life. The secretary would organise an enormous cream cake. Everyone would down tools, gather in the staff room, sign a card, and clap jealously on your achievement. The boss would share a sincere speech before presenting you with an expensive gold watch; a symbol of your time being done.
Whatever savings you had collected, combined with the government's super scheme and the company pension scheme (if you had one) would be all that you needed until you became worm food.
Cut to the present day and that scenario is but a dream. The government super scheme is barely enough to pay for dry crackers and a breezy caravan on blocks. The newly skilled appear quicker, smarter and more excited about doing your job, and if you manage to survive the annual redundancy rounds until you are 65 you are considered blessed. The speech from your boss, cake and gold watch is replaced by a bulk email to all staff and a collection of loose change from your colleagues; enough to buy an unlucky lotto ticket.
The golden watch, aka retirement, is now pretty much your own responsibility and achieving your own golden watch is the penultimate in financial security. It need not be something you wait until your 60s to achieve. All it means is that you have enough money invested and can quite happily live off a portion of the returns until the end of time.
How much money you need for this has little to do with how much you earn and instead is mostly to do with how much you are spending. Because of this it is not restricted to time either. So why wait until you are in your 60s?
For example, If you earn $50k and save $15k (30%) each year then you can expect to retire much earlier than the person earning $150k who can only save 20k (13%) because your expenses as a percentage of your income are smaller. In this scenario you have made choices and designed a lifestyle which requires less money to manage than the person earning more.
| Person A | Person B |
| Yearly income - $50,000 | Yearly income - $150,000 |
| Yearly expenses - $35,000 | Yearly expenses - $130,000 |
| Golden watch savings - $15,000 | Golden watch savings - $20,000 |
| Percentage saved - 30% | Percentage saved - 13% |
| Years until early retirement - 28 | Years until early retirement - 43 |
Even though Person B saves more each year they have to save and invest for much longer to create a money machine that pays out enough to cover yearly expenses of $130k each year. They are going to have to curse their alarm clock, get up, make lunch, say goodbye to the kids and work for an additional 15 years before getting to live the free life!! 15 freaking years!! Person A could potentially sail around the world dozens of times before getting a chance to invite Person B along for the trip.
For those who are righteously saving just 10% of their income, as per popular budgeting advice, it will take you almost 51 years to achieve your own golden watch. There’s no easy way to say this, if that’s you then you are going to have to lift your game… or consider putting a down payment that caravan now.
In the book Early Retirement Extreme by J.L Fisker (average book in my opinion but I wanted to share his graph - see below), there is the following illustration which demonstrates how early you can leave the paid workforce based on how much of your individual income you can save.
The interest rates on savings are listed at the top right hand side. I’ve assumed that Person A and B have been investing at just 5% over time. Where does your savings rate put you?
To summarise, your own golden watch/the penultimate in financial security is a mix of having money put aside AND creating a lifestyle which does not exceed your personal needs. It requires that you make active choices and design your spending to match your personal values, rather than bumping along this life and being emotionally manipulated into spending on things which are designed to keep you poor, employed and wanting for more.
In my opinion, there isn’t a piece of advice out there that will make you wealthier than what you have read here. I believe we have collectively taken our eye off the prize and been encouraged to look in the wrong direction to achieve financial security. We’ve been focussed and getting all giddy like a little girl on finding the best bargains, building a property empire, chasing the high interest returns, complaining about taxes and whinging about the system rather than just concentrating on what we do with the money we rightfully earn and then using it for our individual highest and best use.
It doesn’t matter if you’ve come to this late in the game or have just started your first job. For some of you these columns are going to totally play with your mind. So go and read the ground rules first and stick with me over the coming weeks as we explore more about my favourite topic – your golden watch!!
32 Comments
Yep, if you don't spend it you don't have to earn it. The complexities come in when you allocate, as part of your savings plan, purchase of the facilities you will need at retirement.
For example freehold property contributes by reducing your accomodation costs in retirement but is typically not considered savings. If you put 25% of your income into purchasing this property throughout your working life for this purpose, this too should count as savings.
Many people do this with most of the hardware they will need at that time, buy it while earning so they do not need to when retired.
Obviously food, energy, health services and other consumables you will need to continue to buy, as well as covering the raft of fees and charges levied by all and sundry.
We are all well aware of the sensationalist sales spin crying that you will freeze to death in the dark if you don't save this much right now!!!!
The truth is the fat cats love the easy income. My "savings" for retirement are not necessarily going to be in my superannuation account.
The housing/accomdoation is a big one... but since it flies in the face of what the retirement managers get pai with I doubt we'll see it listed as savings in the future either.
If 15% is put towards equity building in a house (in a place which one is going be for 10 years) then that's using the expense reduction to build equity. It's savings of the best sort...money you were going to have to spend anyway, now paying off the interest you were going to have to spend to permit you to save a little equity.
then there's inflation resistance, and even a little capital gain.
And even if you shift the investment sideways, if you reach retirement age, the value you get not having to pay rent costs is much larger portion of your income than when you originally faced rent costs. And that doesn't run into annuity type issues if you live too long.
And if you handle your finances properly, then you can use your property as security for other low risk investments - it is very difficult to do this with most retirement style products.
Accommodation costs are a vital consideration.
There are increasing numbers of people who rent and will rent all their lives. The problem they face when earning stops, and they still need somewhere to live, is called the "Income cliff"
We have a number of people, currently good earners, who rent. They are driving at full speed towards that big drop.
Most people who read these pages will be chasing the last few % points by shuffling money from shares to bonds to international property and vice versa.
As you say, a more modest approach is more restful.
One thing you didn't clarify is "years until early retirement". I assume that this means that you can retire well before turning 65. And your calculations are based upon using up your entire savings before turning 65 at which time you will have to live off NZ super?
I wish NZ adopted compulsory super scheme like Australia did in 1992. My Australian employer is contributing 19% (plus my 4%), investing in stable and safe scheme it's growing at a healthy rate.. but then they are looking at retiring at 70 so it will be a long wait!
No, your employer is not "contributing" 19% to your retirement savings scheme. He is diverting 19% of your total remuneration into that scheme. If he were not required to do so he could afford to pay you the money instead and then you would be able to decide for yourself how much to put into saving for your retirement, and when to retire on the proceeds.
If you want to invest 23% of your total remuneration into a stable and safe scheme there is nothing stopping you from doing so in New Zealand. But why do you want to force others to do the same?
Yes ad no. At the end of the day the total package to work in OZ is considerably higher than NZ.
Also if you had a job before this came in the company couldnt cut the 19% out of your wages. I wouldnt think they could offer new employees 19% less either to do the same job.
regards
Yes, the total package is higher in Australia than it is in NZ. But that is a separate point from the compulsory retirement saving regulation.
When this came in the compulsory percentage was considerably less than 19%, and it was made quite explicit that the money going into your retirement account was in lieu of pay rises, not additional to them.
It's a big fat fudge, the employer is not contributing, merely providing the means for a portion of your salary package to be placed beyond your reach. Legally, This must be placed in the hands of fund managers who are free to do with it what they will, largely without recourse.
The Government is free to insist that such funds invest any amount nominated into schemes they see fit. The funds are not required to achieve any particular standard of return.
Of course they call it "your" money, of course they will promise to provide a reasonable return, but recent history proves that no such guaruntees can be believed.
The SMSF rules are prohibitively arduous for all but the very fund managers themselves to navigate.
It is naught but a gravy train for the suits and, when the time comes, a way for the government to set future generations adrift into a retirement without income support from the state.
And if you die before reaching retirement age? What use to you was all the income you never had the opportunity to put to work?
Smart young people should choose this industry as a career.
How is the employer contributing? It all comes from the wages budget; there is not magic money sack owned by your employer that produces "employer contributions". The extra that gets paid out into super, is part of your Total Renumeration Package, it comes out of the business revenue stream just like everything else. So it's either wages you won't get, equipment or perks you won't get, promotions the company won't run to increase revenue and wages, or it's money your employer can't pay off their principle debts - and if it's the latter then it's means the business is very shaky and just got worse.
Sorry to tell you, you've been scammed. Someone took your money, told you it was a "contribution", then locked it away so you couldn't use it to invest or repay your debt/credit card/mortgage.
Thanks Sqaure.
KH - It is the percentage that you can save that is the most important determinant. The interest rate on your savings will influence how quickly that money can grow and therefore the time it takes before your savings have reached your personal money machine level.
Thanks to compound interest money invested at 15% will help you reach your destination quicker than money invested at 5%. The lines on the graph represent this scenario.
Stay tuned as I will come back to this equation in more detail in the coming weeks. :)
People who build significant wealth over time tend to be those that are not tempted by the small ticket items like clothes, phones, TV’s, cars and boats. Even when they can afford these things they push past it and keep investing their money and, as Elizabeth suggests, you get a snowball effect. It’s not just budgeting so that you save; it’s avoiding the temptation to spend what you’ve accumulated on non-income earning assets or completely blowing the money on holidays.
Only a 5% return on investments is very conservative; Elizabeth I look forward to your future articles where I hope you’ll comment on options to super-charge investments.
part of the problem (magic for retailers) is that those small ticket items, clothes, phones etc, are effectively consumables - give in to the temptation once, and there's good chance it'll be harder to resist next time, especially when apps or periphals need the latest system to run. It's not just a single splurge, it's a subscription, an addiction to feed.
Those types of items are just phase 1, say you accumulate 1m there is then the temptation to splurge on a nice house, if you do you're back to square 1 with an expensive house to maintain. If you get to 2m there's the temptation of a nice house, batch and a BMW. The temptations to spend and the discipline required not to increase.
The way to look at it is how much income it will generate. You should not spend accumulated capital but instead invest it for income and capital appreciation (so it can be used to generate further income in the future). Using a 4% safe withdrawal rate, your $2m is worth $80,000 per year.
So your choice is buy a big house/boat and lose your perpetual income or reduce your costs to less than $80k per year and never worry about money again.
I've read Jacob 's book and would agree that whilst some parts are 'average' the overall message is pretty powerful. It goes beyond dollars and cents and hones in on our western values of spend, spend,spend. I highly recommend Early Retirement Extreme especially if you're thinking of leaving the rat race before 65.
Worked for me, it helped crystalise my thinking and quantified my savings regime............. as a result I retired at 48.
Both ERE and MMM work well for those looking to retire early. ERE for philosophy and MMM for practical nuts and bolts.
Basically get some skills, earn some money, live simply, save what you can, invest and take some risks when you are young......repeat......repeat....repeat....
20 years later you should have a big pot of money and the habits and knowledge how to live a 'rich' life without the need to spend buckets of cash.
51% not as rediculous as it sounds.
Buffet claims (and I can claim something similar not that anyone here would take my word for it) to have consistently made 50% pa returns before he was burdoned with so much money to invest that he could no longer get these returns (i.e possible to find 5 small caps significantly undervalued to invest 1mill p.a, impossible to find the 10,000 required when investing 2bill p.a, and theres only so much you can invest in a small cap before you push the price too high or end up being the owner); so think about those poor old multi billionaires and how hard it is for them to get a good return these days!
A University of Kansas student asked Buffett about this in 2005:
“Question: According to a business week report published in 1999, you were quoted as saying: “It's a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”…would you say the same thing today?”
Here’s Buffett’s answer:
“Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today's environment because information is easier to access."
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