How to be a millionaire by 65 – Stuff.co.nz

RICHARD MEADOWS

Who wants to be a millionaire? An absurd question. Whiling away your golden years in comfort and style is much easier when you’re perched atop a million-dollar nest-egg.

Unfortunately for many of us, our wealth creation strategy is limited to buying a weekly Lotto ticket and then praying for divine providence.

So it may come as a surprise that just about anyone can become a millionaire by retirement age, with a few caveats of course.

If you’re short on time here’s the big secret right now: regular savings payments, a sensible investment plan and the power of compounding interest.

That may not have been the magic bullet you were hoping for, but the figures are really rather exciting.

If you’re neither self-employed nor a financial whizz kid, the obvious investment vehicle for retirement is KiwiSaver.

That’s because it allows you to siphon off the maximum amount of other people’s money, from both your employer and your fellow taxpayer.

Using the handy www.sorted.org.nz KiwiSaver calculator, we can run the numbers based on the median salary, which according to Statistics New Zealand is $41,600.

Step one: Start young and set your employee contributions at the top rate of eight per cent – a paltry $3,328 a year, or $64 a week.

Step two: Put your cash in a balanced fund, keep on working, and wait patiently for 40 years.

Step three: Profit! Your retirement nest egg has now grown to $1.1 million. Congratulations, and welcome to the millionaire’s club.

We could end it right there.

But if it was that easy, you’d be seeing a lot of wrinklies zooming around in souped-up, gold-plated mobility scooters. The heartbreaking truth is that few make it.

Millionaires are tricky beasts to track down, but a 2008 report by Boston Consulting Group found just 7,000 New Zealand families had a net worth of US$1 million or more.

Clearly, the get rich slow idea isn’t as simple as it looks. Mostly it’s those pesky caveats that are getting in the way, so let’s tackle them one by one:

GET IT STARTED

In your early 20s, ageing and retiring at 65 are foreign concepts – something that only happens to other people.

But the million-dollar savings plan assumes you’ve started putting money aside by age 25. The younger you start, the better, says retirement commissioner Diana Crossan.

”There’s many a person I speak to who thank their parents greatly for having forced them to get into some kind of superannuation or longterm savings plan.”

You’re automatically enrolled in KiwiSaver when you get a job, so most will start saving from their teens- albeit probably not much.

But if you leave it too late, watch your chances of retiring as a millionaire gurgle down the drain.

A standard rule of thumb is that your fund doubles in size every ten years.

Conversely, you will have half that amount -around $530,000 – if you’re aged 35 and a decade late to the party.

The only way to make up for lost ground is to double your payments, which is still only going to be $120 a week (using the median wage)- and you’ll just about get there.

Start at 45, and the law of halves has slashed your potential savings in two again. This time, you’ve only scraped together around $230,000 by 65.

Quadruple your payments, and you might still have a shot. But at that point, you’re going to be diverting 32 per cent off your salary into KiwiSaver – completely unrealistic for most people.

SLAVE TO THE WAGE

Time for another reality check, courtesy of Crossan: ”If you’re on a low or minimum wage for most of your life and you’ve got a family, you haven’t got a hope in hell of becoming a millionaire.”

The numbers alone prove her right. If you consistently earn around minimum wage, by retirement you will have a nest egg of $300,000 – which is still nothing to be sneezed at.

But that’s assuming you’re putting away eight per cent each week. Crossan guesses that for families with hungry mouths to feed and bills to pay, that’s not going to happen.

A chat with Mangere Budgeting Services boss Darryl Evans confirms she’s right on the money. Eight per cent?

The people visiting his office are struggling with the lowest two per cent rate.

In fact, many are queuing up with forms to either take a contributions holiday or try and pull their savings out of KiwiSaver altogether.

Don’t get him wrong – Evans thinks an aspiration to become a millionaire is ”phenomenal”.

”Absolutely I believe people should be saving for their future,” he says.

”But just through this time of recession, I genuinely know that people are finding it very hard.”

It’s not just us lesser mortals – even budgeting gurus struggle. Evans himself was contributing the magic eight per cent, but has now had to fall back to four per cent.

”In the eight years I’ve worked here -and KiwiSaver’s been around for about four- I’ve never come across anybody else that pays eight per cent,” he says.

Don’t give up hope yet. If you have no dependents, or do but are on two decent incomes, the door to the millionaire’s club is still open.

CLIMBING THROUGH THE RANKS

The only failing of the Sorted calculator is its madly optimistic assumption that you will receive a juicy 3.5 per cent pay rise each and every year.

You know there’s an element of wishful thinking when striking workers are taking to the picket line to fight for less than that.

To look at the worst-case scenario, if you earned the median wage of $41,600 throughout your entire career, you’d only come out with around $450,000.

Crossan says getting the bare basics sussed – job, salary, efficient mortgage payments – is one of the keys to accumulating wealth.

Sometimes it’s as simple as asking for a promotion, she says. Otherwise, you might need to take a punt on upskilling or furthering your education.

THE TIN CAN APPROACH

The calculations so far have assumed your cash has been invested in a balanced fund, with a real (after tax) rate of return of 3.1, 3.6 or 4 per cent, depending on total income.

In the 4 years since March 2008, all the KiwiSaver funds monitored by Morningstar have returned an average of 3.26 per cent after fees.

Those rates are pretty dismal. In part, they’re a sign of the times, but it doesn’t really matter anyway:
”Saving never was and never will be predicated by the interest rates, but by systematically putting money aside and keeping it there,” says Andrew Lendnal, a Wellington-based financial author.

Lendnal has watched people pull in $100k a year, only to spend $120k. The old adage applies here: it’s not how much you earn, it’s how much you keep.

His out of sight, out of mind philosophy is dubbed the ”tin can” approach. Normal savings accounts are all too tempting to dip into, he reckons, especially for those with itchy fingers.

In that regard, KiwiSaver is ”just amazing”, Lendnal says.

The cash comes straight out of your pay packet before you have the chance to fritter it away, then it’s firmly out of reach unless there’s very good cause to withdraw it.

A CRACK IN THE NEST EGG

Brace yourself for the final bucket of cold water. You’ve faithfully and diligently squirreled away eight per cent of your pay packet. Now you’ve hit 65, and you’re ready to live it up on your big fat stash.

But all the while, inflation has been steadily eating away at your savings, and that cool million has nowhere near the buying power that it does today.

The Reserve Bank aims to keep the inflation rate reined in between one and three per cent, but ”aims” is the operative word.

Since records began in 1862, the rate has averaged out at 2.7 per cent per year.

To be on the safe side, we’ll factor inflation in at three per cent, on the upper end of the scale.

That means after 40 years, your $1 million will have the buying power of about $500,000.

Perhaps it’s a bit mean to recalculate this late in the piece, but to truly equal today’s rich listers, you’re going to have to save almost twice as much.

Starting on the median salary, that would be 16 per cent of your pay packet – a pretty big ask.

In straight cash terms, you need to be putting in $2000 every month to be a ”real” millionaire at retirement. For those on higher salaries – say $80,000 or so- that’s not an entirely absurd proposition.

LET’S RECAP

If you want any chance of being a millionaire by 65, you need to start young, earn a good wage, make regular payments to a sensible scheme, preferably have no kids, and make sound financial decisions.

Crossan provides some comforting words for those who have just realised their bank account is never going to break into seven figures.

”There might be a ‘millionaire’ who doesn’t have money but has good health, good family and all those things that actually make life worthwhile,” she says.

In fact, that’s something she’s been firm on since the start of the conversation.  Her job is to encourage people to get the most out of their finances, not just to get rich for the sake of it.

After all, she reminds us, ”money doesn’t buy happiness”.

It sure does buy some pretty cool stuff, though. Get saving!

– © Fairfax NZ News