When most people are running scared and fearful of what 2009 will bring, I suggest you run the other way.
It's time to focus!
The most important question in your life right now is…
How much money do you need to retire, quit working and be financial secure from the rest of your life?
Have you ever thought about that?
…Really sat down and worked it out?
It's an important number, don't you think? Yet I bet that you've probably never spent much time thinking about it, or you could even be avoiding the issue completely because you think the number is too great.
I personally used to be in the second category. Never thought about it and afraid to even begin. It would certainly upset my weekend.
How was I going financially? Broke, of course.
Until I confessed to myself and realised it was an important question. …More on that later.
Back to the story.
So what I thought I would do was go to a finance professional and ask them how I should be going about calculating this number. After all, they're the experts aren't they?
I can't mention the name for obvious reasons, however his formula he gave me was…
Are you sitting down?
Calculate your current investment assets and multiply that by 5%. That should give you an income figure without having to eat into your capital.
Add the value of your home equity an divide that number by the amount of years you expect to live.
To this, add the income you expect from inheritances.
No kidding, they included this one as well. Again you have to divide that number by the number of years you expect to live.
Add the amount of Social Security you expect to receive.
Add any expected annual pension payments.
Add other royalties, fees, part-time work, etc.
Confused? Did you give up half way? I'm happy to admit that I was a little bit lost.
Just give me the damn number, dude. (Alas, no number forthcoming)
What is obvious here about this calculation, is that it tells you not so much what your number is, it simply tells you what your income is likely to be in today's dollars based on your current net worth.
For most people, even this vague number would be frightening.
Anyway, an interesting calculation, you should do it yourself even though I don't totally
agree with that.
When I asked the financial planner about forecasting and looking to the future, his words were… “That it was difficult to forecast because there were so many variables that needed to be taken into account.”
Sounds like we have a future politician on our hands.
All the financial planner wanted to do was simply highlight the shortfall and then put me on an investment plan where he could periodically lose my money slowly over 20 years. He was obviously talking to the wrong guy.
Now, what I failed to mention to you earlier was that I was not telling him my personal situation, I just fabricated a typical middle income scenario.
About $60,000 income with an asset base of $600,000. (Clear equity)
Had I gone to a Storm Financial Planner, he probably would have got me to borrow $6 million, put it in the market – only to lose 50% of that and completely destroy my financial future.
Oh, by the way, the financial planner that I was talking to, interestingly enough was about 15 years younger than me.
He went on to say that the rule of thumb – (and this is scary as well), is that in your retirement you will be likely to need less money then what you are spending now. Something about saving on commuting to work costs and not having to buy expensive clothes liked suits and dressy shoes, paying off your mortgage, blah, blah, blah.
So, does that mean that in retirement you're supposed to live off 50% of your current income, even though right now on 100% of your income you're just over broke?
Hmmm… Some retirement that would be.
I don't know about you, but I want to have a lot of fun when I retire and I certainly don't want live off 50% or even compromise on my current income.
You know it's an important number to figure out and then work towards. It's pretty simple actually, no rocket science needed.
Next week I'll give you a super-fast way to actually calculate this number… Simply by working backwards.
You cannot live in denial with regard to this number, you have to face it and deal with it head on.
Sweeping it under the carpet aint going to cut it.
lInda Schmidt says
1. First I went to a =n ex bank manager who told me that the properties I had offers on would not wash and I would not be able to do it. He was a broker for Lawfund. As I was three quarters of the way in to these investments I kept going and did buy but sold as well thinking I was wrong and he was right. What a big mistake. Second His partner I will call them the three wise monkeys as there was three of them, a financial advisor with the professional name of Fiducian (which inplies integrity)took $2450 of me to tell me to go back to work and sold those properties without taking a single look at where I was and what pro active action I could take without selling. He would not give me his strategys until all the properties were sold and by the time he told me he was really excited (did not what for) he was going to get me to invest in Managed Funds None of which he explained to me. I realised that I had made a BIG BIG mistake I went back to work. The third member of this party is my accountant who when I asked to help me crunch the numbers to see the best action to take with the sale proceeds did not help me and pushed me into selling my first and prize property in Mandurah. Now I know people should tell me to move on and beleive me I have but I was still getting the message from everywhere to get financial advise. So off I went to another one who only did managed funds was selling all his property as an example to me to do the same and would not be charging me much but what sort of money would I make in managed funds AGAIN. Then off I went to another who wanted no less than $8000 to start me off interviewing seeing where I was and putting me Yes you guessed it Managed Funds. Then year in year out he wanted $14000 to help me manage this portfolio. Well you can guess I do not use any of these peoples services. What I find most discusting of all is thatthey are so damm dishonest and think they know it all and they are so blatently out to make money for themselves it is not funny. Despite asking for the $2450 back I did not get it YET I do not have time to persue it actually and do not want to go to that negative territory. I could have gone back to work and KEPT those properties The set back has been enormous and now with the economical climate I am well and truly stuffed.(sorry to use slang ) So it is back to the Nursing and or buy some wonderful positive cash flow properties and try to get a 4.99% fixed interest loan. Know anyone By the way I am learning all about shares and how to save 20% on Managed funds and I am watching the super fund carefully as they lose money hand over fist as well. Something has got to be done very promptly as we baby boomers are increasing in numbers very fast.
Thankyou for your newsletters and encouragement I am watching the DVD series I purchased last year and they have a lot in them that (although I do know quite a bit of it) is Helpful Linda 08 92997960 0435 016 021
Peter Morley says
Very good comments Jon. I’m a financial planner and have listened to the drivel spoken by planners.
I agree with you…..why would I want to live on less than I earn now. For heavens sake I want more. Help my children and grandchildren, give more to Rotary and have a good time wining and dining, travel etc.
I will be interested to see how you come up with the ‘number”.
I normally add 50% to the current gross income multiply by expected years in retirement and assume a 10% drawdown tax free per annum from a super fund.
How they get to the final sum is still the problem. Got any suggestions?
Chris says
I agree, financial planners are useless and biased towards certain products. A dangerous and unnecesary risk which i found out the hard way.
They enter the market at any time, with no stop loss policy and overleveraged so when the market falls you get a margin call and your capital is destroyed. How can an average tradie like me point out fundamental problems to these so-called experts with university degrees? I would love to go public with the name of the fool who lost my money but he could probably sue me although I can’t sue him for losing $150000 in under 12 months! Incompetence in the extreme…
John Harmer says
G’day All
I am a public accountant. As such, I am forbidden by law from giving financial services advice. I cannot even tell a client to bank their tax refund. Because a bank is a financial services product. As I said, I am forbidden from giving any finacial services advice. All this after working as an accountant for very many years. And giving all sorts of financial advice because I was the one who knew all about it. All this because the peak accounting bodies did not consider that looking after members interests meant working to keep its members ability to give financial advice (as they had done since the time of the great flood) was in any way important.
Enough of that
Back in the day, if I was asked how much money a client needed to retire, I asked two questions. First, was how old will you be when you retire? Second was, if you were to be that age and retiring tonight, what would you consider would be an adequate income to retire on?
With these two bits of information, I could work out the number of years my client could expect to live, based on average life expectancy (about 79-81 here in Australia the last time I checked). It’s a simple calculation then. Number of years of life left times annual income needed equals the income needed to survive financially. The sum calculated can be in cash or assets that can be converted into cash. Remember that you can’t eat a bank account, a share, or real estate. The figures need to be adjusted to allow for the changes in money value over the years to actual retirement but my client at least had something to aim for.
Oh, one other thing. I told my clients was to always get more than one opinion. there is no such thing as unbiased advice on matters financial. All financial planners have their own wheelbarrow to push. Only very recently, I had a financial planner from one of the banks tell me that he would never recommend a financial product offered by a particular insurance company. I know why. The insurance company is owned by a competitor bank. Its pathetic
Cheers
John
Melbourne Australia
Vladimir says
My formula is easy! Star with desired income eg $200K Nest egg required $4m.
multiple this by 1.5 ie $6m. This allows for income drawdown of $200K and enables capital to continue to build so that future income is increased with inflation.
Live to enjoy life, don’t live to survive. 2009 will create the best opportunities we have had in decades.
Michael Hofmann says
In the begining of August 2007 I pulled all of my money out of shares and put it into cash. I felt that the market was set for a massive fall. It appeared to me that the governments and the financial experts were working together lying, stalling for time and still trying to ramp the markets up. Fundamentally they were heading for a huge iceberg and there was nothing they could do so they stuffed as much money into their pockets, told everyone everything is OK and then jumped ship. Are they going to jail, will their ill gotten gains be taken from them and will the laws change? If no, we’re doomed because you cannot run an economy without trust.
I told my friends two years ago that I believe the smart people are moving into cash.
In March 2008 I sent an email to friend who was getting close to retirement. I told him I thought that Coal Seam Gas companies are potential takeover targets. Not only that. They have a huge future. There are a huge number of reasons for their long and short term success. He made a fortune.
He almost paid a fortune for training courses on how to trade stocks about three years ago. I talked him out of it telling him it was a lot of bulldust. I taught him for free and couple of years later he is a wealthy man.
Last November I set up a mock portfolio on the ASX website for a friend who wanted to learn about share trading. The 60k portfolio is now worth 200k in January.
My friends have made a lot money from my research over the years.
I’m no expert and have been wrong as well. My score would be around 80% right. I am only a middle class tradesman. Am I rich? No. I am an over cautious investor. My friends who ran with my ideas made the big bucks.
Anyway. Where to from here. Unemployment is going on a rampage. This problem alone will feed on itself. It’s the price you pay for exporting jobs and importing foreign money to spend. For the world to get back on track the average person needs to earn a wage, pay the bills, save for something they want to buy and have money put away for a rainy day. It will take years for this kind of rebalancing to happen. Why the governments believe lending more is the answer is beyond me. It’s what got the world in this mess in the first place.
The cure? Value add local products. Grow it here, dig it up here and then make something out of it here. You’ll hear more of it now and in the future. Not “Globalisation” but “Localisation”. We may be heading towards a very ugly time of tit for tat protectionism.
I spoke to a very wealthy man from Canada in China late last year. He is in his 40s and never has to work again. I agree with everything he said.
Forget about deflation. It won’t last long. Sooner or later inflation is going to go through the roof. Printing money 24 hours a day will devalue it’s currency. Cash in the bank will be worth very little. The only safe place will be in chunks of Gold. There are a lot of wealthy people sitting on cash waiting for the right time to move into buying mode. I wouldn’t like to use the word predators.
They are waiting for a total collapse of the market. Why? Because even after all this has happened the crooks are still on the loose. The governments are now dumb enough to be feeding them without making them accountable.
Now it’s taxpayer funded parties and bonuses. People put the blame on George. Too simplistic a view. The whole world is responsible for this mess. We were all dumb enough not to question the credibility of these so called experts.
No one will invest money until economy becomes more transparent.
As for a recovery in the second half of this year? Tread carefully.
Just for interest watch Aoe, Bow, Mts, Lgl, Sgx, and Ncm.
Terry Clarke says
I have just recieved a letter from my employment Super fund asking me to consolidate all my super into their fund. They have been paid 1.75% of my funds to lose $80,000 of it over the last 12 months . To me this is government endorsed robbery by stealth, and yes it is my fault I did not move to cash over 12 months ago. The cheek of it is because they are getting 1.75% of less they want me to give them more. They must be joking!!!!
Terry C
Goerge Mikeal says
who do you believe and who you trust with your hard earned money !
please explain ………
Rodney says
Thank god for your comments Jon. I firmly believe and you reinforce the fact that there is a lot of bad advice out there. Keep up the good work.
John Barnes says
Hi Everyone,
As always great comments from John always look forward to his e-mails. My gripe concerns the vast amounts of money which people have lost from their Super Funds. I was fortunate enough to take my Super in cash having retired early at 55 before the current crises began. I am sick and tired of hearing the major Super Funds advertising on television saying “remember guys Super is a long term investment , everything will be all right in the future.” Now I have no doubt that the Stock Market will recover in time but what about all those “close to retirement ” people who have lost 20 to 30% or even more and will have to delay their retirement.
The thing that bugs me more than anything is that most Super Funds have alternate investment strategies which protect the investors capital although providing minimal returns, as professional investors know one of the keys to financial succes is to protect your capital at all cost. To the best of my knowledge the average everyday investor knows very little about their own Superannuation Investment strategies, however I have not heard of anyone from the major Super Funds advising anyone to transfer some or all of their funds to lower risk investments. I know that they would say that you should seek professional advice but as we all know the average investor will not do so and anyway why should they have to pay large amounts of money for such advice.
As a footnote just before I left work I suggested to a couple of former wormates that they may think about transferring their funds into a more conservative investment strategy. Both of them did and following a visit to my former workplace recently they were very quick to thank me for my advice so if a layman like myself could see the coming of the “impending doom and gloom” then I am sure the major Super firms could of as well.
Kind Regards
John Barnes, Perth, WA.
Darleen Schumans says
What are your State’s requirements for the license? Will the Agency in charge of the license waive any of the requirements because of your military training? You need to talk to the licensing agency. . ., you’re wasting your time here.