It’s an all too common trend in our business to meet people who fail to plan ahead.
Jack and Jill, aside from enjoying sailing in their spare time, have a business which funds their lifestyle but is not necessarily readily saleable when they cease working. They have a mortgage-free home, no dependents and just a few more years before they are entitled to NZ Super. They appear to be in a great position but, like many New Zealanders, they are asset rich and cash poor.
A review of their financial situation would separate their assets into two categories: lifestyle assets and investment assets. Lifestyle assets are the things that cost you money: your car, your home and chattels. Investment assets are those that make you money such as bank deposits, bonds, shares or managed funds, including KiwiSaver. Where this becomes important is that although Jack and Jill own their home, they will no longer have the means to fund their current lifestyle once they stop operating their business.
Jack and Jill have become accustomed to a lifestyle costing $90,000 per annum. When they sell their business and have to live off NZ Super they will face the prospect of living off just $30,000 a year, leaving them with a shortfall of $60,000.
So, the question is: where will that money come from? How do Jack and Jill move from working for money to a position where their money is working for them? Hopefully, they will be able to sell their business, but it may not realise enough to make them financially independent.
We, at OnePlan for Retirement, would recommend, upon retirement or preferably before, Jack and Jill setting up a diversified investment portfolio that’s flexible enough to deal with a change in life circumstances and robust enough to support them for the next 25-30 years. To achieve this, they will need in the vicinity of $1 million sensibly invested. Although this may seem high, it is actually attainable, provided they set their goals early and capitalise on the power of compounding returns.
The reason most people do not act on their goals in life, is because they do not set them in the first instance; so start small and start now, so you don’t end up like Jack and Jill, not quite up the hill and still struggling to get pails of water. www.oneplan.co.nz