Whether you are planning on buying a yacht and sailing off in to the sunset, or if you have no intention of doing that but you do plan to retire at some stage – then this post is for you!
Saving for your retirement is a hot topic here in New Zealand. At the ripe age of 65 you can quit your job, spend your days, playing golf, doing lunch, travelling the world, doing whatever you like because at age 65 you will be entitled to New Zealand Superannuation – yeehaa! If you are married, then you can expect to get NZD$288.10 each a week…
Now I don’t know about you or your budget or living expenses… but $288.10 a week is only about $15,000 a year. If you are living in a house paying rates, power bills and insurance, driving a car around that costs about $100 to fill, buying food, some new clothes every now and then and having the occasional lunch out or trip away… $288.10 a week doesn’t go very far.
Besides I am wanting to retire about 20 years before I qualify for NZ Superannuation…
If you live on a boat – you might be able to stretch the dollars a little further. There are many blogs out there that give you a breakdown of their boating budgets. Some people are able to live super frugally on board. Sailing as much as possible to save on fuel expenses, anchoring instead of staying in marinas, eating on board instead of eating out etc. I love this concept however I want to be able to afford to rent a car and go exploring inland, stay in marina’s and hotels every now and then, be able to fly home or fly the kids out to visit etc.
What is your sailing budget? How much income you might need will be up to you – to get an idea of how much it costs to run a boat you might like to check out my Budget your Boating article.
But where is this money going to come from? I want to retire at 45 and go sailing! I don’t want to be working if I don’t have to… Just how do you go about creating a passive income – i.e. money trickling in to your bank account without you even having to get out of bed to get it…
Have you read the legendary book – Rich Dad Poor Dad? If not you should buy it! This book has been around for years and is full of great ideas about getting your money to work for you. The sooner you can get started the better.
So what are some options for creating an income without having to go in to an office and earn it?
Firstly you might like to have a think about your net worth. Add up all your savings, properties, cars – all your assets that you could (and would) sell today and get money in the hand for. Deduct all the mortgages and loans that you have, and then you should get a $ figure. This is your net worth.
Once you know how much money you already have then you can figure out how you might get your money to work for you while you go sailing (and how much more money you are going to have to save to get the income you require!)
So what is the best investment for you?
Say for example you wanted to earn NZD$40,000 a year – how much would you need to have invested?
With worldwide interest rates at an all time low, the bank is a safe but not very appealing investment choice. At present, the best term deposit interest rate is 3.8% – and this means locking your money away for five years.
You are going to need to deposit $1,150,000 in the bank to earn $40,000 a year.
The money is reasonably safe in the bank, but to get this high rate it is locked away for five years and it isn’t earning you a great return.
I have got a love hate relationship with property. Here is what I love about it:
- You can borrow money to buy it and then borrow against the property to buy more things
- Usually the value of the property increases as the years go by
- You can live in it or rent it out
- It is insurable
- You can renovate it and increase it’s value
- Rental properties have various tax benefits (in New Zealand) if it is geared correctly then you can get tax refunds to help you pay for the expenses on the property
- When you come home from sailing then you have a property you can live in. (Once you get off the property ‘ladder’ it can sometimes be difficult to get back on again if prices are always steadily on the rise)
Yes property is cool to own. It is tangible, and if you rent it out then you can get someone else to pay off your mortgage while it quietly increases in value.
But… there are lots of things that suck about owning properties as well…
- Interest rates – you don’t have any control over these
- Tenants – some are angels, others are down right criminals and will do their best to wreck your property and not pay their rent, and make life as difficult as possible for you. Tenancy laws are skewed in favour of the tenant
- Maintenance – houses need painting, gardens tamed, leaks fixed, all sorts of repairs that take time and money. Great if you are a handyman living nearby, not so easy if you are sailing around the world and you have to pay someone else to manage it.
- Earthquakes – oh you don’t have earthquakes? No neither did we in Christchurch until we had a huge one and all the houses got broken. Five years on, there are still people fighting with insurance companies to get their houses repaired or rebuilt.
- Vacancies – if there is a downturn in the market, then your house could sit empty for a while, how are you going to pay the mortgage if someone else isn’t?
- Other expenses – rates, insurance, interest, maintenance, property management fees – these all add up and eat in to your return.
- When you decide you want to sell it, you might not be able to sell as quickly as you had hoped.
- Some countries have capital gains taxes and stamp duty and other silly things that make property investment less desirable.
When things go well and you have got good tenants and a good property, then renting it out is fantastic and easy and worth it. But the market can change, the tenants can be idiots and this can make life very difficult.
My advice – if you are going to have a rental property – and you aren’t going to be around – have it professionally managed. You will of course pay for this, but it means that you wont have to be chasing up arrears, and organising repairs from overseas.
If you want to earn $40,000 a year from your rental property, then you are going to need to get at least $900 a week in rent. From the $900 you can deduct all the expenses, like rates, insurance, property management and maintenance, to get $769 a week in your hand (Presuming you don’t have a mortgage on the property)
You are probably more likely to get $450 a week from two separate cheaper properties – than trying to get $900 a week for a more expensive property. But then with two properties you have two lots of expenses as well… either way, you are going to have to invest well over $1,000,000 in either one or two properties to earn $40,000 a year. Remember though that you will also get capital gains as the property increases in value. but trust me – it isn’t easy money…
I started investing in the share market a couple of years ago now. It is great fun and an interesting way to earn (or lose) some money. The bank I am with has an online share trading account, so you can buy and sell until your heart is content (or you run out of money)
Now I am not an expert, and I think to be really good at this then you need to spend a lot of time researching the companies you buy shares in. You would probably need to have a good internet connection to be trading in shares on a regular basis which could be challenging while at sea. You can decide if you want to buy shares that pay dividends, or to invest in shares that are likely to increase in value. Investing in shares – i.e. buying and holding them, is different to share trading, where you might buy and sell on a regular basis.
To give you an idea, some shares that I bought have increased 138% in value! Others have decreased in 60% in value, so it is all over the place. Other more blue chip type shares just steadily increase and pay a dividend along the way as well.
I have enjoyed dabbling in the share market and if I had more time and expertise, then I think they would be a good place to invest your money, but it is all a bit too time consuming for me, so I am gradually going to sell my shares and invest in…
Fund managers are experts in all things to do with the share market. They can purchase shares in local and international shares, and you can decide if you want to invest in a riskier and potentially higher earning fund, or a more conservative and stable return.
Depending on the fund you invest in, your money is usually available to be either drawn down in smaller amounts, or as a lump sum. When you are still saving you can make regular smaller deposits, or throw in larger amounts when you sell property or shares. The key is to start early and make the most of the compounding interest.
You can look back on various fund’s performance. A growth fund that I invest in made returns between 4.27% and 14% – an average of 6.44% over the last five years. Interestingly the conservative fund averaged out at 5.99% over the last five years, so not that much difference really.
So say you could get an average annual return of 6.44% then you would only need to invest $620,000 to get a return of $40,000 a year.
ONLY $620,000? That is a lot of money right…?! Well divide that by two people to make it sound more appealing – $310,000 per person. add on how much it costs to buy your boat, then sell your assets, invest them in managed funds – get saving people!
After all that hard saving, you don’t want to go and spend it all in one go. So you’ll need a strategy to stretch it out.
Here are some things to think about.
- Take your total savings amount and divide that by your life expectancy and spend up to that amount every year.
- Keep your funds in three ‘buckets’
- one to cover off expenses for the next 1-3 years and include some cash for any emergencies. This could be in a normal bank account.
- The second can hold income producing investments such as bonds.
- The third to hold long term growth assets – something that is going to be earning more interest than current inflation rates.
Check out the Sorted website for all sorts of interesting templates & worksheets to figure out how much you need to save and that kind of thing.
Whether we make our target or not, whether we keep properties and rent them out or sell them and put the money in investments, I am not sure as yet. But rest assured I am saving hard to reach our target. And if we don’t quite get there – well we are going anyway. We might just have to work along the way, or tap in to some of the capital instead of just living on the interest/return. Either that or win lotto or something like that.
So if anyone has any great tips on how we can retire early and any other get rich quick tips – please do share so we can get going sooner. I certainly don’t want to be hanging around working for another 25 years so I can start collecting my $288.10 a week in pension…