We are often bombarded with information relating to retirement planning.
How much do you need in Superannuation for a comfortable retirement?
What is the best way yo save for retirement?
Should I buy an investment property to help fund my retirement or put money into a share portfolio?
All of these questions are very legitimate questions that need answering, but they are not the right place to start.
A view I take and which we adopt in our business is to start with Why.
Simon Sinek in his great book, Start with Why, speaks about this, I encourage you to get a copy and have a read.
From a retirement perspective, starting with Why simply means – Why would you take any action, adopt any strategies or decide to implement anything without understanding Why you are doing it.
When you are retired, what are you? Sounds like a strange question, but what does it actually mean?
In simple financial terms, it means you no longer work, earn an income or draw money from an action pursuit.
You are in fact drawing income from your assets.
I talk about this in my book, Freedom Assets. Retirement planning is all about creating assets that produce the income you need.
The question is, how much do you need in Assets to generate a solid level of income.
Well, I state in my book, and talk about it all the time with our clients, $3M of assets (Net Assets, that is assets minus and loans) at an interest rate of 5% (from dividends/rent etc), will give you $150,000 of income.
How close is that to your current after tax income now?
Retirement planning therefore comes down to 3 steps.
1. Work out how big your ‘Cliff’ is
What do I mean by Cliff? The cliff is the drop in income you will have when you retire. As an example, if you earn $150,000 as a couple after tax now, when you retire, what will this figure be?
If the figure is $50,000 a year, then the cliff is pretty large. $100,000 and its getting better.
To work out your cliff, simply look at your net assets now (excluding your home, assets less loans) and times this figure by 5%. That will give you the net income from your assets now. If you don’t like that figure, its time to start planning.
2. Know your retirement assets gap
We spoke before about how much assets you need in retirement to generate $150,000 of income per annum – $3M.
What are your current net assets?
What is the gap between this figure and $3M?
That is your retirement asset gap.
3. Understand how much you can commit to closing the Gap and your Cliff
Once you know your income cliff and your retirement asset gap, you can begin to work on closing these figures.
There are really only two ways to create wealth or retirement assets.
Using your current assets to grow more assets and using your current cash flow to invest and create assets.
That is it.
In future posts we will explore the assets you can create.
But for now, start with these 3 simple steps tor your pre retirement planning