“Why thinking about retirement now?”
Said my partner the first time I brought up the topic. This’s not unexpected – both of us are still on our way to mid-20. The topic of retirement sounds a decade too early to discuss, and we believe that our current lifestyle is as important as our future ones. There’s no point in saving each cent and eat bread everyday so we can enjoy it later when we are old. We have seen our parents work their entire life, until they forget how to enjoy the money they currently have. Not exactly what we want.
Though, there’re still differences in our focus. He focuses on the ‘inside’ – our current lifestyle and how to improve what we have, e.g. how we can spend less time on chores and how to choose the items that will last. I focus on the ‘outside’, e.g. how can we invest now so we have more time to do what we want to do later? Will I get to where I want to be if we manage it the way it is now? Will he? (The answer is no for me, but I will get there in a minute).
Where I want to be? This is what I told my friends: “I want to be able to visit my friends, whenever and wherever they’re in the world.” And want it asap, like 10-15 years from now, not when I am 50. Sounds a bit extravagant, but really, I just want to spend more time with people who are important for me. This is not uncommon for anyone.
Let’s break the ‘want’ a bit to make it clearer:
- Friends – those who I already know and those who I have yet to meet. Resources needed: time and opportunities to meet new people. Achievable now.
- Whenever – refer to time and flexibility, without the limitations from to work and other obligations. Resources needed: enough income that support my partner and myself without needing much time and involvement.
- Wherever – anywhere in the world as I have friends across countries. Resources needed: time (to travel) and passive income (hey, no work during holiday).
So the big part of my want is a reliable, non-time consuming income source. I don’t have it now, but it can be built starting from now. Similar to how retirement fund is built over the years. Hence, the immediate questions are:
- How much capital do I need?
- When can I get there doing what I am doing now?
- What do I need to do differently to get there faster?
How Much Do I Need?
Based on ASFA Retirement Standard, a couple in their retirement age need a minimum $56,236 after tax income to live comfortably. This is given that they have fully paid their home, so there’re no rentals to be paid. But this is not too relevant for me (First off, I have not owned my own home!).
So let’s estimate the minimum based on a rough breakdown:
- Savings: $500 per month
- Mortgage payment: $3000 per month ($424,000 mortgage, 25 years at 7% interest rate)
- Travel: $1000 per month (based on $12,000 per year)
- Utilities: $150 per month (Electricity + Gas ~$270+ $180 per quarter)
- Food (including eating out): $1000 per month
- Transportation: $240 per month
- Health: $200 per month
- Others: $910 per month
Based on the above, the ballpark figure for a really good lifestyle (not eating bread and baked beans all day) for two is $7,000 per month, equates to $84,000 per year after tax or $115,000 before tax (excluding superannuation).
Highly achievable for any couple in Sydney (the average weekly income for two people household Sydney in 2011 is $2410), except the part that this need to be achieved without working 40-50 hours per week.
So really, to get there you (and I) need a big pool of equity that generate certain % of income. To make it easy, say we need $X amount in bank savings that generate $115,000 of interest per year. Bank interest in Australia hover around 4%, so let’s estimate the figure $X around this.
- X if bank interest is 3%: $115000/0.03 = $3.8M
- X if bank interest is 4%: $115000/0.04 = $2.8 M
- X if bank interest is 5%: $115000/0.05 = $2.3M
When Can I Get There? How?
Getting there through savings
The numbers look grim…
- To achieve $3.8M with bank interest is 3% – save $6,503 per month for 30 years. Not achievable at all unless I get two to three times my current salary.
- $2.8M with 4% interest – save $4,014 per month for 30 years. Possible, but I will be eating bread everyday and no entertainment.
- $2.3 M with 5% interest – save $2,742 per month for 30 years. Achievable, and I will still be 54 years old by then.
Conclusion? There’re no way to get there earlier if I keep doing what I am doing.
Getting there through investing in property
This one is not straight forward and have lots of assumptions:
- I buy well and property value doubles every 10 years.
- Average property value is $300,000, gross yield 5%, 4% after costs.
- I buy one property every year.
- Loan is interest only for 15 years, so the amount of mortgage stay the same.
- Year start 2013, goal to achieve 15 years later (2028).
Total loan is $300,000 x 10 = $3.0M
Total property value is = $6.35M
- Property 1 will worth $850,000
- Property 2 will worth $800,000
- Property 3 will worth $$740,000
Total equity = property value – loan = $6.35M – $3M = $3.35M
The Equity generate 4% yield per year after costs = $134,000 per year before tax.
Sounds more promising, and achievable when I am 39. Well, yes, still tad old, but better than the savings scenario. And by the 10th years (2023), I will have $58K income before tax, which will enable my partner and I to cut work hours if needed.
Bottom line is…
… it doesn’t matter how I get there, whether it’s through savings or property or shares or winning a lottery. The above calculations just tell me that I need to achieve a pure equity of $2.8M that generate 4% yield to achieve my goal.
Yes yes, this is ballpark figures, and doesn’t take into account factors like inflations and risks attached with different type of investments. But well, I need to start somewhere. Don’t we all?