To find out how much investment income I needed a year I went though my cheque books for the previous 12 months and simply added up all the "living expenses" withdrawals - ATM, eftpos, cheques.
It came to $13,000 (plus $3000 of one-off elective expenses). A lot less than I thought and I'll bet your readers would come up with much lower figures than they expect.
Most people over 50 living in mortgage-free homes without children (they should have moved out by now) spend much less than they realise.
The problem is that if these people simply guess their retirement income requirements, they will overestimate and, instead of easing back and enjoying their 50s and 60s, they'll waste those years striving to build up a nest egg much bigger than they need (to generate more retirement income than they require).
Very sad. I recommend the 12-month exercise I did - it's an eye-opener.
A. Basically, it's a good idea, although I would have thought it might be easier - and more reliable - to subtract your savings from your income and assume all the rest is living expenses.
One concern about doing it your way is that you might overlook items such as direct debits. But a bigger worry lies in the assumption that your spending won't change.
Especially if you're looking ahead into retirement, you are quite likely to spend more on medical costs and other health-related items.
On a brighter note, you might also spend much more on travel, hobbies or whatever other activities you take up.
Still, your idea certainly gives a base to work from.
And, while people like me tend to advise readers to err on the generous side when estimating future expenses - it's better to end up with too much than too little - you have a point about over estimation. There's a lot to be said for enjoying your 50s and 60s, or whatever decade you are in.
By the way, quite a few people over 50 have young children. And quite a few more have older children who still live at home. While you might be right, that in many cases they should have left home, it doesn't always seem to work that way!
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Q. In response to the 70-year-old retiree seeking a $40,000 a year return, you indicated (two weeks ago) that you needed a lump sum of $390,000 to achieve this.
How does he manage to get that amount of return from that size investment?
A. By using up the lump sum over 10 years, as well as earning interest on the declining capital. In case you're not the only one who didn't quite get what I was saying, I'd better clarify it.
The correspondent wanted to know how much he needed to save so that he could take out $40,000 a year after tax and end up with nothing after 10 years.
I referred him to an internet calculator (www.interest.com/hugh/calc. Click on "Retirement Payout Calculator".) It showed that if he invested $390,000 at 3 per cent after tax, he could take out $40,000 in the first year.
Then, each year after that, the withdrawal could grow by 3 per cent a year, to allow for inflation. After 10 years, the account would be empty. Not everyone thinks this is a good idea, though. Read on.
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Q. As a regular reader of your Saturday Herald column I was pleasantly surprised to read that one couple (in last week's column) want to retain their capital and factor in for inflation.
The trouble with spending the capital is that you cannot predict how long you are going to live. And, yes, a base of $2 million is required to do it securely, but preferably double that amount to allow for adequate elderly health care, emergency surgery and the like.
This doubly brings home the point of starting out early to build a wealth base. And the one investment most critical to doing just that is the investment in knowledge, which sadly the passive investments you suggest fail to help with to any significant degree.
At least with a rental property - and I am not a fan of residential rental property as an investment tool - there is scope for building up a knowledge base if managed actively.
And if you apply yourself judiciously there is scope for adding value both in returns and in capital while legally minimising tax obligations.
I prefer direct investment in commercial property, though with that, as with any investment that is going to offer better than bank deposit returns, there are traps for the unwary.
Here, I go back to the investment in knowledge, also the application of good savings. This means developing the habit of living below one's means.
At 44 I live in a rented bedsit about 100 metres from one of Auckland's nicer beaches. It costs me $150 a week, including power.
I work in the building industry for a modest wage, which I live on. I don't own a car, a boat or nice clothes. I eat out at least once a week and have one overseas holiday a year.
Also, I have a geared commercial property portfolio worth about $1.8 million that would allow me to retire today, living solely on the cash surplus if I wished, about $30,000 in a managed fund and about $40,000 in cash.
Fifteen years ago I was practically broke!
Now I am looking to buy into a proven franchised business, not (just) for the money but primarily for the knowledge and business skills I will pick up.
I realise there are no guarantees, but from my perspective I honestly believe that unless you are very old the investment in knowledge and the subsequent application will provide the best returns.
A. Your suggestion that a retired couple needs $2 million, or preferably $4 million, will depress many readers.
You're right that starting young helps. But, unless you are a truly impressive saver, a big earner or an heir, you must also be willing to take risks to accumulate that sort of money.
You are the type who copes well with risk. And you're also willing to be frugal and to put lots of time and energy into your investments. Good on you.
I agree that acquiring knowledge is particularly important for direct investment in property.
I also agree that people who invest passively - I assume you mean in passive share funds, or index funds, which I often recommend - don't learn as much as direct property investors.
But that's one of the great beauties of index funds: You don't need knowledge.
You indirectly own shares in many companies. Some will do well; some badly. There's no reliable way of knowing which will do which, but it doesn't really matter. Over the long term, most will grow.
The more we've debated share funds versus property, the more I'm convinced that it comes down to personality.
Many property investors regard the time and energy they put in as fun, or at least a sort of rewarding hobby and don't count it as a cost.
They're usually not well diversified, and may not be well compensated for the risk they take. But, with a little bit of luck, it all works fine.
There are some who come a cropper. But the world doesn't hear about it in the same way as if a prominent stock, or the whole stock market, falls.
Meanwhile, investors in index funds put in very little effort. And they may do better than many property investors.
I'm in one camp; you're in the other.
Getting back to the $2 million or $4 million, people with much less live comfortably in retirement.
While you're quite right in saying that if you use up capital there's a danger you will outlive your money, you can always plan to use up half or three quarters of your capital. That leaves a buffer if you live unexpectedly long.
Another option is to buy an annuity. You give a lump sum to a life insurance company, and they give you monthly payments for as long as you live.
The trouble is that annuities aren't a very good deal in New Zealand. They can work quite well, though, for those over 75 or 80.
One idea, then, would be to use up part of your capital by age 80, and then put the rest into an annuity.
I'm ignoring the issue of leaving some money to your family. But too many people live too poorly in retirement so that their better-off children can inherit.
Why not leave the kids your house and spend the rest yourself!
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