KEY POINTS:
How much do we need to retire on comfortably?
Building up enough wealth to retire comfortably, whatever that figure is, depends on conquering your ancestral brain, which is hardwired to cope with living on the savannah, not making rational investment choices, says author Arun Abey.
Abey, an academic and then financial planner who founded the financial advice and investment management organisation Ipac Securities, has just published his second book. Called How Much is Enough?, it focuses on turning the science of behavioural finance into plain English. Abey, who spent 25 years in the financial planning industry, wants people to rethink their lives by concentrating on happiness and wellbeing.
Quoting Warren Buffet, arguably the best investor of all time, the author says: "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."
Those emotions, says Abey, are what leads us to make catastrophic mistakes in investing and erode wealth.
On the savannah, where those emotions evolved, keeping up with your peers literally kept humans alive. These days those same emotions lead to consumerism.
"Today people are often judged not by whether they are worthwhile human beings, but whether they have the right clothes, the right car and all the other 'right stuff'. The way the mind works doesn't exactly make it easy to stay focused on what's important."
The book looks at achieving happiness and wellbeing, says Abey, because too often financial plans focus on the plan and asset allocation, not the person.
When it comes to the question of how much is enough money, Abey says anyone who reads the book and follows its principles is likely to need less money to retire on than they expected.
"A lot of money is inefficiently spent because what we think will bring us enduring happiness often proves very temporary." Too many people look for shortcuts to fulfilment - one of which is money.
The book "seeks to give each person a framework and knowledge to explore and question themselves".
Abey, who lives in Sydney, says that he and his family could live on A$50,000 ($58,000) a year, if it wasn't for his love of overseas travel, which adds about A$30,000 to the equation. His tastes, however, are modest and he spends on experiences, not consumer goods.
The Business contacted two New Zealand-based investors who retired early. Financial coach Anton Nadilo decided in his early 20s that his goal was to retire at 35 with a passive income from property of $50,000 a year. "I was earning about $30,000 at that stage and $50,000 seemed like a lot of money."
Nadilo sacrificed nights out, fast cars and consumer goods in his 20s - often working on finding or renovating property on Friday nights when his mates were socialising. What's more, he has always spent his money on life experiences such as fishing and diving, rather than keeping up with the Joneses.
Retirement didn't suit his personality and Nadilo has gone on to become a financial coach and author, and has set up the My Money Mentor franchise. After working with many investors he believes that $100,000 a year is probably a more comfortable figure for a retiree.
That's a figure that property investors Kerry and Robyn Mason - semi-retired in their 50s - agree with. At the beginning of their quest to become financially independent through property, the couple believed they would need to build up a property portfolio of $1 million over and above a mortgage-free home. Now, because yields have fallen and costs have risen, they realise that $1.5 million to $2 million in investment equity is a more realistic figure.
Like Nadilo, the Masons don't spend large on consumer goods. But they live well. For six months of most years, they crew yachts in the Mediterranean and elsewhere in the Northern Hemisphere, which brings in a small income and pays all their living expenses, reducing the money they need to live.
The vast majority of retirees don't have their finances that well sorted, but Michael Littlewood, co-director of Auckland University's Retirement Policy and Research Centre, says research by the Ministry for Social Development suggests that 92 per cent of retirees in New Zealand do not suffer hardship.
The big question is whether New Zealand superannuation will be means-tested in the future, says Littlewood.
As a rule of thumb, he says that for each $10,000 a year you want to earn over and above super, you need $150,000 in invested assets to produce it.
That's if you aim to retire at 65. If you want to stop work at 50, as many of financial planner Susanna Stuart's clients aim to, you'll need more. In that case, for $50,000 net a year, - assuming at least a 5 per cent return after tax and inflation at 2 per cent - the capital required is $987,000. If you want $100,000 a year, the figure would be $1,975,000.
"This is using up all capital and income leaving no money at 80. You would need heaps more capital if you want to draw down income only," says Stuart.
* Diana Clement is an Auckland-based personal finance and investment writer
How Much Is Enough? by Arun Abey and Andrew Ford. A&B Publishers. A$29.95
