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How to have a worry free retirement – Part 2

Kingsley and I started doing our 10 year goals in 2005. We had very ambitious financial goals which included having a stock portfolio worth $1.5 million and a property portfolio worth $2.5 million because we thought this was what we would need to be financially secure.  We saved aggressively by putting $50,000 into super every year. We also invested aggressively and borrowed as much money as we could to purchase investment properties.  We bought investment properties instead of our own home as it was more tax effective. The result of doing this was a lot of stress and we would worry whenever we did not have tenants in the rental property as cash flow was very tight. We were also not happy renting as we really wanted to have our own home. I started to wonder if it was worth having such a stressful life in the present just so we can have a comfortable life in the future.

Then I read a book that radically changed my views on retirement planning and financial security. The book was written by Stephen Pollan, an American financial advisor and had a rather negative sounding title called “Die Broke”. The author challenged the conventional thinking that we all had to stop working at a specific age. If we are doing a job we like, why should stop working just because we reach a certain age? Warren Buffet and Rupert Murdoch are still actively running in their businesses in their eighties. Both these men can easily afford to retire but they continue to work as they obviously enjoy it. If we work for an organisation, we may be forced to retire at a certain age, but there is no reason why we cannot do something else that we enjoy to generate active income as long as we are healthy enough to work. Doing something that is mentally stimulating is also good for our mental health and we cannot imagine spending our retirement just doing leisure activities like playing golf while waiting for the dividends and interest to be paid into our bank accounts. The author recommends working for as long as you can, doing work that you enjoy, and scaling down your work progressively e.g. by reducing your hours of work as you grow older. To make up for the lost income from working, he suggests turning a portion of your retirement capital into an income stream by buying an annuity.

For us, we decided we would start our own business in something we are passionate about and will continue to work in the business for as long as we are able. As investing is our passion, we want to build a business in investing to generate a consistent income for ourselves, and helping others to do the same so they can achieve financial security for themselves. Starting a business does not necessarily require a lot of money. For a small amount of capital, you can start an internet business selling information products in a niche that you are passionate about like this guy who turned his interest and passion about herbs into a business (http://www.learningherbs.com) that comfortably supports his family. If running a business does not appeal to you and you cannot find a job because of your age, you can always do volunteer work. Non-profit organisations will always welcome your contributions. I had a lot of fun using my IT skills to teach computer classes for senior citizens in a community learning centre in my neighbourhood.  If you are over 55, you might even qualify for Newstart allowance if you do more than 15 hours per week of volunteer work. If you do not think you have any skills, you can host a homestay student. As long as you can cook a hot meal a day, you can the turn the spare bedroom in your house into a tax free income of $250 per week after the kids move out.

The author also challenged the conventional wisdom of building up a huge nest egg so we can live off the yield during retirement and then leaving the capital to our children after we die. If we die at the normal life expectancy which is in our eighties, our children would be in their fifties or sixties. Getting a big inheritance then would not be as helpful to them compared to getting some financial help when they start out in life. I know I would prefer my parents to help me with a deposit to buy my first car or home, rather than leave me an inheritance when they die. If we adopt the Die Broke recommendation to consume capital by progressively converting it into annuity income streams, we will need a lot less capital to live comfortably right up to the end, so we do not need to be too obsessed with having a huge nest egg. Annuity income also makes a lot of sense as it is a low stress method of getting a consistent income as long as we are alive. We don’t need to worry about outliving our money or being cheated of our money especially if our mental capacity deteriorates. Financial abuse of the elderly is more common than we think, and this is currently my biggest fear for my parents who suffer from dementia.

As mentioned Part 1, the key to financial security is having income that exceeds your expenses and that is true at whatever age. Today, I hope I have given you some simple ideas for generating extra income, and how you can maximise your income even if you have a small amount of super when you retire. Next week, I will share some practical ideas on how we can reduce our expenses and still enjoy a comfortable life.

- Christina McDonald

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