You see, as a general rule, when we’re younger the bulk of the income needed to fund our lifestyle and pay our bills will come from our physical exertion. That is, our jobs pay us a wage — or for the self-employed, lifestyles are largely funded from any business profits. And hopefully, there is some money left over, after you have paid all the costs to run your lifestyle, to start building an asset base.
However, as we get closer to retirement, we want to see the burden of paying for our lifestyles funded largely from the financial assets we have accrued throughout our lives. Now, that income could come, for example, from interest payment on term deposits, government bonds, dividends on shares or rental income from your property portfolio.
Easier said than done.. Due to lack of proper education and training, most investors make mistakes that keep them from living the lifestyles they want…especially as they near or reach retirement.
The 3 Biggest Mistakes Made By Most Investors
- They don’t have a plan to achieve the levels of income they need in retirement
- They arrive at the investment party late
- They underestimate how much they’ll need in retirement
Let’s take a look at each of these one by one — and how you can effectively avoid these traps and come into retirement with the wealth to fund the lifestyle you truly want.
- Lack of Effective Planning
There are a whole bunch of reasons why people fail to plan for their financial needs in later life.
Some just lack the skills to create a plan to help them better achieve a level of financial security later in life. Remember, we aren’t born with these skills — and we certainly aren’t taught them in school!
Some tried setting goals, failed, and have now given up on the process. Again, effectively setting and achieving goals isn’t a skill most of us are taught.
And then, some just don’t see the importance of future-proofing their lives. They might currently be in a high paying job or a stable relationship, thinking the good times will last forever.
We know life has its ups and downs. We know market conditions are going to change. The key is that we have different strategies for all of these times.
But perhaps the most important single piece of advice we could give anyone looking to create financial security and enjoy a great retirement is this: the earlier you start to plan and prepare, the better.
The good news is you also don’t have to do it all on your own. At The Property Mentors, we work one-on-one with each of our members to help them design and plan what their ideal future might look like. Moreover, over the long term we not only help hold them accountable for their dreams, but also fast-track how soon they can make those dreams a reality.
- Waiting Till The 11th Hour
Let’s run through an example of what we mean here with the case of Sarah as she travels through her financial journey.
Sarah has just started her first real job after graduating with a marketing degree from a good university. While in her early twenties, she’s more focused initially on paying the rent and her other bills than investing for the future. Any extra money is quickly spent on eating out, partying or adding to her fledgeling wardrobe.
By her late twenties, Sarah is doing OK. She’s had a few promotions, her wardrobe is far more impressive, she owns a 5-year-old car and has saved up enough money to travel overseas now and then over the last few years. Sarah soon meets who she thinks is her perfect life partner in Geoff, and they are ready to get married and start having children. Now, the wedding costs them a small fortune, and they sensibly decide to put off having kids for a few more years.
Given that Sarah and Geoff now have access to two wages, they figure they can now take on the responsibility of a mortgage; so they commit to buying their first home together. Sarah is intelligent and decides they shouldn’t overextend themselves; they still want to remain near where they have been renting, close to their family and friends.
But she looks at property prices she soon realises that they can’t really afford to buy the type of property she really wants in the area she wants. So Sarah has a dilemma: compromise on what and where they live…or take on a bigger mortgage?
They are on two good incomes, after all, so they decide to provide their future children with a great home and take the plunge. They move out of their 2-bedroom apartment into an older style, 3-bedroom single story house for $830,000, located 12km from the Melbourne CBD. It’s a bit further out than she wanted to be, but she’s content that whilst more than she wanted to spend, it will provide them with a great nest in which to raise a family.
But of course, any extra money they may once have had is now going into paying off the wedding and the new mortgage. Even so, they’re both working hard and they agree to take at least one overseas holiday each year.
After a few years of paying the mortgage, Sarah falls pregnant with her first child. Now Sarah also wants to take a few months off to care for the new baby. Given they’ll be back to one wage, they decide that the overseas holidays, dinners out, and wardrobe upgrades will have to be sacrificed. But they’re happy to do it — after all, their first child deserves nothing but the best.
So now the baby is born. Sarah and Geoff soon find out that these adorable little critters also cost a small fortune to run. Medical bills, cots, prams, nappies, bottles and a whole bunch of things they had never bought before suddenly start to eat into the family budget.
But now Sarah’s 8-year-old car is having problems and is no longer safe enough to drive around in — especially with their new precious cargo. So they go into more debt to finance a new car. In the back of her mind, Sarah knows she should be doing something about investing for their future, but with baby brain and little to no reserve funds, that idea quickly falls to the bottom of her very busy pile of urgent things to do.
Sarah is back at work 6 months after the birth of the first baby, so the pressure on Geoff to keep providing financially for the family is temporarily lifted. But no sooner have they got back on top of all the mounting bills, Sarah falls pregnant again with their 2nd child, another girl.
Now in their mid-thirties, Sarah and Geoff are finding that after the mortgage and costs of raising 2 growing kids, they’re not able to save much at all. Even so, Sarah is resourceful and manages to squirrel a bit away each year.
By their early forties, they have managed to save a little bit; also, Geoff’s mum recently passed away, leaving them with a small inheritance of $60,000 in cash and a small number of Telstra shares. But now what do they do with that money? Well, with no clear wealth plan in place, the option of taking the kids to Disneyland is too hard to resist. And with the house being older and in serious need of an upgrade, they decide to spend $15k on the US holiday and $35k renovating the house to upgrade the kitchen, bathrooms and add a small extension to their bedroom to include a master suite.
Geoff’s income has continued to grow and Sarah has been able to work part-time from home, but their lifestyle costs have simply gone up to match. Now they have the girls’ education to think about. They would both really like to send them to private schools, but know that the costs of private education are going to stretch them. What the heck, they’re worth it — Geoff and Sarah both commit to doing everything in their power to make sure the girls get the best education possible.
Fast-forward to their late forties. Now the kids are nearly done with school and both want to attend university. They will need to stay at home a while longer, but Sarah quite enjoys having them around. For their eighteenth birthdays, they both receive new cars from Geoff and Sarah so they could get to uni safely.
Now fast forward to their mid-fifties: the kids have finally left the nest and have taken financial responsibility for themselves…although they both seem to pop over to get the washing done and a free meal more than is probably healthy. But now here are Geoff and Sarah in their mid-fifties, who only now can finally start to focus on preparing for their retirement.
Their only real asset is their family home, which has gone up in value. They’ve managed to pay off some of the mortgages, but it can’t provide them with any income into retirement, unless they want to take on a boarder or rent out a room or two on Airbnb. The Telstra shares haven’t really done that much and only provide them with some modest dividend income at best.
Their superannuations are sitting in a managed fund and is worth $200,000 combined.
Given that this would only provide about $10,000 p.a. if invested, providing a 5% p.a return — and that their lifestyle costs are many multiples higher than this — they soon realise they will both need to keep working well beyond the 60 years they’d initially hoped for.
Additionally, they need to make up for lost time and start aggressively investing, if they’re going to have any chance of hitting their financial targets. This causes them to chase higher returns and riskier investments to try and make up for their lost time.
Can anyone see a problem with this strategy?
- Underestimating How Much You Will Need In Retirement
So, back when the Age Pension was first established in Australia back in the early 1900s, the average life expectancy was 54.2 for men and 58.8 for women.
Since then, Australians have been living longer and longer. Therefore, the amount of money required to see you through in retirement has also grown. Now, some Australians are comfortable surviving on the Age Pension. But for most of the people we speak with, the thought of having to rely on government handouts in their golden years is not something they really want to consider. They might have seen their parents, friends or neighbours struggling to enjoy their lives on such a modest sum, and don’t want that to become their reality.
The problem for many trying to plan out their cost of living tomorrow is that they use today’s dollars.
Inflation is in many ways like a silent stealth tax. For example, according to the State Library of Victoria, back in 1970 a loaf of bread cost just 21 cents and a litre of milk was a mere 19 cents. Today a loaf of bread is more like $3.50, which represents a 1567% increase.
So, inflation generally works in your favour during the asset accumulation phase of your wealth building. That is, things like houses tend to go up over time, partly due to inflation. However, inflation is a dual-edged sword and tends to work against you in retirement — the value of your dollars generally decrease over time. But don’t panic! This can all be worked out mathematically.
So what’s the moral of the story? To get the very best results, start your investment journey early — as soon as possible — with a great plan that has been mathematically calculated to account for the rising cost of living.
Ready to make that plan? Schedule your no-obligation chat with us now!
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