Yes, you read that correctly - double your net worth in retirement.
While most people are trying to figure out how to make it to 80 without going bankrupt, I share advice from a couple who retired at age 62 with US$2MM in total net worth and today they have just over US$4MM 20 years later.
They are fully retired, they are not lottery winners nor are their children, who they put through college, supporting them. They are self-directed investors, with high school educations, and the main breadwinner did not have a company pension (as he was self-employed and self-made).
They accomplished this while living through a dot-com crash, a housing crisis, a great financial crisis and all while surviving cancer and a natural disaster that destroyed their home. They enjoy themselves, like most retirees, by playing golf, taking cruises and indulging their grandkids. These tips are based on a phone interview with the couple.
On Taking the Long View
- Put 25% or more of your income toward retirement, not the touted 10%. (If you are reading this and under 40, put 30% or more towards retirement - you'll thank me later.)
- Don’t wait to retire to figure out your strategy. Understand your retirement investment strategy 15 years in advance (or more) to see how it pans out through different investment cycles.
- Aim to create an asset base from which you create multiple income streams: dividend income, rental income, fixed income etc. for a 3-4% annualized real return.
- If you expect to get a pension, do not rely only on your pension. If your company goes through hard times, pensions are the first item to go on the chopping block.
- Their government social security represents only about 30-35% of their monthly spending, and their investment income makes up the rest.
- Learn how to invest your own money to minimize all the fees that are siphoned off by the financial services industry.
- Understand what liquidity really means. Many highly touted "liquid" assets can become highly illiquid given the crisis du jour.
- Liquidity II – Don’t build your retirement wealth around highly illiquid assets such as wine/art/stamp collections.
- Preserve your income producing assets and avoid capital gains tax where possible. If you are in a location that does not tax capital gains today, expect those tax rules to change in the future.
On Investment Strategies
- They held, on average, their dividend paying equities for around 10 years and fixed income instruments for between 5-12 years.
- They are contrarian investors; they do not chase trends upwards. They went after low hanging fruit which included buying Apple and Qualcomm in the low $20/share.
- Worst investments: Their worst investments came via financial services industry "pump and dump" type recommendations, most notably: The Manhattan Fund (fraud).
- Caveat Emptor on Gold – only twice in a lifetime will it be a good investment.
- Divorce your political leanings from your investment philosophy. Savvy investors know that tax laws are written to benefit those with wealth not those without regardless of who appears to be in power.
- Understand the difference between buying a bond and buying bond funds. And get comfortable investing beyond just laddering bonds or TDs/CDs as yields may stay low for years to come.
- Be nimble and remain flexible - Be willing to look beyond investments in your home country to take advantage of growth, appreciating currencies or higher yielding income streams.
- Keep the speculation to a low roar - only speculate with what you can afford to lose permanently (usually less than 1% of your net worth).
On Inflation
- Plan on at least 2% a year; more where medical and long term care are concerned.
- Aim to live on 60-70% of your last pay check, not 85% used by the financial services industry. By shooting for a lower number you are psychologically readying yourself for the full force of inflation.
- You can choose to control how much you spend. There may be years you choose to spend less depending on how your investments have performed. They started 20 years ago spending $84,000 a year and today they spend around $90,000 despite 2-3% yoy inflation over the course of their retirement.
On Taxes
- Max out every tax sheltered account you have whether it’s a government pension type of account (ie CPF), individual accounts (401ks, IRAs), trusts and stay abreast of the trend of tax changes that may impact these assets.
- Invest some of your wealth in tax-sheltered assets such as high quality municipal bonds.
- Realize that not all tax-sheltered assets are created equal and some are investment traps (see note on liquidity).
- While you want to do everything you can to legally minimize exposure, they are not completely avoidable. Treat them as an annual expense and not as a penalty for investing. People who see them as penalties for investing, inevitably make poor investors.
On Life
- Live like Old Money Wealth, Not New Money Climbers.
- It’s Retirement not High School: Comparisons are the thieves of joy. Don’t compete in retirement with your peers the way you did between the ages of 13-64. There is zero benefit comparing where you are at with other people.
- Expect something to go wrong and have a plan for it.
- Eat well and exercise; avoid stuffing your face at buffets with other retirees.
- Expect to live longer than you think so keep learning, and embrace change, there’s low cost adult education everywhere.
- Avoid costly hobbies like yacht ownership; take up kayaking, tennis or bowling.
- Charitable giving is good, but actively giving of your time is better.
- Don’t piss away your money on gambling, over-eating, shopping, boy toys/cabana boys or gold diggers. If you are lonely, get a library card.
Their assets changed over time but they have generally been 70% in financial assets and 30% in property/real assets. Their investments are simple investments that are accessible to any individual investor anywhere in the world, and none were high-risk high-reward investments like hedge funds. They did not invest in touted life insurance policies such as annuities or whole life, or similar commission driven investments.
They took pride in their ability to preserve so much of their wealth, which shows a healthy sense of self-restraint. This couple has concluded that they will start digging into their asset base soon, as they are unwilling to take on certain market risks at this time – which at 80 plus years of age, and amid much current financial turbulence, makes perfect sense.
From what I’ve seen from my client base, those that retire with US$5MM or more in investable assets, doubling your money over 20 years is relatively easy by living off investment income. That said, many retirees who had US$5MM or more in net worth never imagined their wealth could halve as it did during the financial crisis. Which is why arrogance and ignorance are more costly than anything else when it comes to investing.
For those with less than US$5MM, it is very, very difficult to double your investments in retirement, so what this couple has done is nothing short of remarkable. The lesson here is this: More important than just “your retirement number” are the habits you create, your psychological preparation, the strategies you employ and the attitude that you approach retirement with.
Coming in May: Finance 101 for College Students