Have you ever read personal finance books, such as Secrets of the Millionaire Mind, Rich Dad Poor Dad, The Wealthy Barber (and The Wealthy Barber Returns), or The Automatic Millionaire? Do you consider yourself a personal finance master, painstakingly following the guidelines of money management, savings and investment set out in any of these books?
Have you been prudent in building your nest egg, paying down your mortgage, maximizing your RRSP and TFSA contributions, and minimizing (even eliminating) your debt?
Or are you in the difficult position of realizing that you only have a few years left until you retire, and you’re wondering how you’re going to sustain the lifestyle you’ve been dreaming about after decades of work, and realizing it’s actually going to cost a lot more than you’re prepared for?
I thought of writing this while I was enjoying time at The Beach in Toronto with my wife and daughter. It’s a close feeling to being on vacation without actually going on one, and without spending a dime. As I stared out into the beautiful vista of Lake Ontario, I imagined what my retirement would be like.
And then I realized… I’m probably never going to retire!
For one, I don’t intend to ever stop working in one way or another. I’d continue to run my business, lead and influence a team, and build some form of contribution as my life’s work. My definition of retirement isn’t the point where work stops and I get to just lay down on a beach somewhere and enjoy the rest of my life in peace and quiet.
I would love to spend time with my family, travelling the world, having great experiences — and so my definition of “retirement” is the point where I’ve built enough wealth and resources that I would have total freedom over how I spend my time. And if I wanted to drop everything I’m doing that’s business related and take my family to vacation, I could do it without thinking twice. My vision of retirement also includes owning several properties as investments generating passive income, with my primary residence being totally paid off. And having all the resources I need to live the lifestyle I want.
Everyone, including you, has a different vision of what their retirement could look like. But there’s one thing we all need to have to make retirement dreams come true. It’s called wealth. There’s an interesting chapter in Rich Dad Poor Dad that describes wealth in such a simple manner that you’d be able to gauge how wealthy you are without using complicated personal net worth calculators. The definition of wealth is this: if you were to stop working today, right this very moment, how many days would you be able to survive before you’re completely broke? Before your resources run out?
This is my favourite definition of wealth because it is very simple. Why? Think of it this way. If you’re working to earn a bi-weekly paycheque, and you have no savings, your ability to survive relies on the continuity of your job. This means you’re not really wealthy at all. If you stopped working and you no longer receive your paycheque, you wouldn’t survive very long. You have no wealth.
Some may have a certain amount of savings in the bank. Perhaps you’ve been able to accumulate six months or a year’s worth of money equivalent to your earnings. But that would mean once you stop working, you only have six months to a year to live. That’s no way to reach retirement yet alone sustain a retirement lifestyle.
Where does wealth come from, and how can you build wealth so that you can enjoy a retirement lifestyle without going broke?
Many personal finance books talk about saving 10% or more of your income, putting into investments that generate an annual, compounding return, so that you can build enough wealth that you could live off of it when you retire. In principal, it seems straightforward enough. But how much do you need in order for you to retire? And what investment vehicles make sense to invest in?
I’m not a financial advisor (except to myself). So make sure to check with your own advisor before pursuing anything I recommend here. But let’s just throw some numbers around and fantasize about our retirement lifestyle and what kind of wealth we need to fund it.
Firstly, let’s figure out how much money we need to sustain our everyday life. Think of the income you’re currently earning, and the amount of expenses your livelihood currently incurs. If you have kids, they probably won’t be living with you when you retire, so you won’t have to feed them, clothe them, and pay for their tuition any longer. If you’re married, you and your partner will need to look at how much you plan to spend on your basic necessities — food, clothing, shelter (and transportation of course).
This calculation could get even more complicated as you try to figure out how long you’re going to live after you officially stop working — but that’s not something I’m going to get into here.
Let’s say you retire at 65, and you’re going to live until 100. That’s 35 years of wealth you’re going to need in order to live comfortably.
How much do you need per year? Keep in mind as I write this we are in the year 2019. You’ll have to factor inflation into the equation. But just for the sake of creating an example, let’s pretend you need $30,000 a year to live comfortably. It doesn’t sound like much, but let’s remember you probably have your mortgage completely paid off, you don’t have many of the expenses you did when you were in your 30’s, 40’s and even 50’s, and you’re also receiving a government pension (at least let’s hope so) — which we’re treating as a ‘bonus’ and not included in our calculations.
So you need $30,000 per year to live before taxes.
Let’s multiply that figure by 35.
That works out to $1,050,000.
Yes — you need at least $1 million in cash to retire. And I consider $30,000 per year a modest lifestyle. You’ll be able to cover your day to day expenses, spend on leisurely activities such as dining out and pursuing your hobbies, and even travel. (And if you want an even more extravagant lifestyle, here’s a hint: save A LOT more.)
So back to our example. You need $1 million dollars. How old are you today? And how many years do you have left until you retire?
Let’s pretend you’re 35 years old. And you’re 30 years from retirement.
If you’re only saving money without generating any kind of return on it from investing in stocks or other financial instruments, you would need to save $35,000 per year — and remember, that’s in after-tax dollars. This is different if you’re actually earning a return on your investment, of say anywhere between 6% to 10% (or more), in which case compounding interest makes hitting a million dollars in savings a lot easier.
If you’re starting earlier, let’s say at the age of 25, you’d be able to save more money and exceed your goal, or you could spend more in disposable income, save a little less and still accumulate $1 million by your retirement.
Let’s say you’re 55 years old, and you’re only 10 years away from your retirement. The question becomes — how much money do you currently have saved, and what will it take for you to hit the $1 million or more mark in savings?
Obviously, this is an exaggeratedly simplified, jotted down on a napkin type of savings calculation to figure out your retirement wealth. Remember — I told you I’m not a financial advisor!
In another article I’ll write about the ways you can generate returns from financial investments based on my own experiences and the experiences of my colleagues.
But today I want to present another possibility for you, in addition to just saving $1 million dollars.
The possibility is investing in real estate.
In addition to your primary residence, which should be paid off by the time you retire, the way to build real wealth is through investing in assets that generate passive income. Stocks that pay dividends are an example, and even GIC’s — but GIC’s don’t typically pay enough for you to be happy with. Investing in real estate will help you not only build equity, but also help you build passive income which can contribute to your retirement needs.
Here’s an example.
My wife and I purchased a condo before we got married. We rented it out for a year, and moved in to live in it after we had gotten married. After our first child, we moved to a house but kept the condo as an investment. As of the day I’m writing this, we’re ten years away from having the mortgage completely paid off.
We’re going to keep it as an investment property and when we hit retirement age, with rents increasing ever so rapidly in the City of Toronto, it’ll probably be generating positive cash flow of about $3,000. That’s after we pay maintenance fees, taxes and any other costs of owning the condo.
With the example above of needing $30,000 a year in retirement lifestyle expenses, this condo alone would generate $36,000. My wife and I would be able to sustain our retirement lifestyle without even having to tap into savings.
That’s only one investment property. And remember, the ideal situation is to also have your primary residence paid off.
But what if you aggressively accumulated two, three… maybe five investment properties, and over the course of your working years you were able to rent them out, contribute some payments towards the mortgage, and have them paid off by the time you retire? What would your retirement look like then?
That is my ultimate vision for my own retirement. I’d keep on working, past the age of 65, on businesses that I love — but my family would have the ability to live the lifestyle we want. I could be working while sitting on a beach (which will actually happen sooner than later anyway).
Let’s oversimplify this example and let’s say you owned five condos outright, each producing positive cash flow of (let’s be modest) $2,000 per month. That’s $10,000 in income you’d be earning in retirement. And if you’re not a workaholic like me, you wouldn’t be working — you’d just be enjoying your retirement years travelling, or gardening, or doing whatever it is you like to do (as you can tell I have no idea what retirement really looks like).
I know several friends who are working and executing this very strategy to fund their retirement lifestyle. Sure, financial investments such as RRSP’s, TFSA’s, investing in dividend stocks are great. But think of the power of investing in real estate for a moment, and the kind of wealth it can possibly build for you.
The question for you as I wrap up writing this: What does your retirement look like? What’s your vision? What have you done to get there? More importantly — starting from today, what will you do to get closer to that vision so you can enjoy your retirement lifestyle?