What's Your Number?
We have regular conversations with clients about financial independence. How much do I need to accumulate before I have the option not to work? When can the money start doing the work?. For most people this is about having the option and not the obligation to work.
The answer is logically met with another question. How much do you want to spend? As a guideline if you have €4m of assets you can spend about €10,000 per month net of tax (index linked) for the rest of your life. The €4m includes all assets such as investment property, capital value of defined benefit pensions (i.e., the HSE pension). However, for many this level of monthly expenditure will not be required.
We use software to design personalised financial structures for clients. We ran an example with the following assumptions:
- Husband and wife, age 45
- Assets split as follows:
- Pensions 33% (split evenly)
- Corporate 33% (say in a holding company) with full CGT on exit
- Personal 33%
- We have assumed a starting level of expenses of €10,000 per month
- Investment growth of 5% (blended)
- Inflation of 2.5%
- State Pension applies (2)
In this scenario the couple at age 100 have met all their expenditure needs for 55 years and have a residual value of €11,000 (excluding any properties) at age 100 without any future earned income. Interestingly the spend at age 99 has gone from €10,000 per month to €37,013 per month with inflation over a 44-year period. Obviously, this example is very high level and based on assumptions, in real life consideration will need to be given to amongst other things - risk tolerance, sequence of returns risk, variability in spending versus standard inflation, structure of assets, taxation.
For individuals wanting to increase their chances of financial success, other factors worth considering include:
- Dynamic drawdown. This gives flexibility in drawdown
- Have sufficient protective reserves – cash deposits, short term fixed income, annuities for example
- Use a liability driven approach to asset allocation. Your asset allocation should be personalised to your financial structure
- Diversification (and this isn’t just a load of funds from different fund managers !)
- Tax efficiency in drawdown
- Work with a high quality financial professional. In the US Vanguard estimate that a good advisor can add circa 3% per annum * in extra annual return
As wealth increases the investing element should become more straightforward, whereas building a financial structure with ongoing evaluation as life unfolds can be the more complex element.
For most people, this level of wealth is not realistic at such a young age without the good fortune of a business exit/ liquidity event. However, a lot of people are more financially successful than they might expect – the discounted value of someone’s human capital (the ability to earn money year after year) is huge and will usually allow an individual over time to accumulate enough wealth to reach financial independence and enjoy a comfortable retirement. In the next blog we will talk more about how to make sure you and your family earn that human capital.
If you want to find out what your number is and how to design your tailored financial structure, please reach out to a member of the Biograph Wealth Advisors team.