I first met Archie and Avril a year ago. Archie had just turned 60, and Avril was in her early 50s. Like many Kiwis, they wanted to plan for their retirement so that they could spend their later years travelling around New Zealand and occasionally overseas. They’d recently bought a motorhome, and Avril was keen to take their dog with them when they toured the South Island.

The Goal

To fund that lifestyle, they calculated that they would need $100k passive income per year.

And while this was below their current household income of $170k, their expenses will be lower by the time they reach retirement. That’s because they won’t need to be saving or putting money towards other investments.

So how much money would they need to generate that passive income? That’s where the rule of 4% comes in. This rule says that $100 of assets can make a 4% return to live on.

So, to make $100,000 a year, Archie and Avril will need $2.5 million worth of net assets (assets with no debt on them) to create that income. So, the question became, “how could we create $2.5 million of assets* over the next 14 years?” The time they wanted to retire.

The Gap

Like most Kiwis, Avril and Archie weren’t starting from scratch. They had six figures within their KiwiSaver and would continue to contribute. On top of this, they’re confident they’ll receive the NZ superannuation in its current form because of their age. When you crunch the numbers, this will provide the equivalent of $900,000 of assets.

The pair had a wealth gap. What they were currently doing would not give them the lifestyle they wanted. So, Archie and Avril need more assets … $1.6 million in the next 14 years.

If they continued what they were doing, they wouldn’t be able to live that $100k a year lifestyle. In fact, they’d primarily be living off the pension.

The Plan

We initially planned for the pair to invest in two new build properties. One in Christchurch and another in Auckland, which I set about finding. Based on a respective capital growth rate of 5% and 6%, they were initially projected to retire on about $95,000 in passive income. Not entirely their goal, but close.

The challenges

One of the significant challenges with Avril and Archie is their age. The banks are typically hesitant when lending to older Kiwis. That’s because the bank is lending money for 30 years, but what happens if Archie decides to retire in 5 years when he turns 65?

In these situations, you must give your bank an exit plan. You need to explain how they will get their money back. For Archie and Avril, the exit plan is to sell the investment properties and pay back the bank at some point. Archie also plans to keep working part-time past the retirement age so that the properties remain affordable.

If Archie worked a physical job, the bank might not accept this. But since he works in an office, the bank has agreed that this is reasonable. The good news is that the couple got the lending approved for two properties – which they’ve now purchased.

The Outcome

After a year of working together, I caught up with Archie and Avril to review their plan. Since purchasing those two properties, they have collectively increased in value by $120,000. That’s an extra $120k of equity that can contribute towards their retirement. And based on our updated projections, they’re now on track to overshoot their goal.

The Lessons

There are a couple of important lessons to take from the couple’s story:

1. Taking an income hit in retirement is okay since some expenses won’t carry with you. You likely won’t be paying a mortgage or paying for childcare in retirement. While Avril and Archie earn $170,000 today, they are happy to retire on $100,000.
2. As you get older, getting money out of the bank becomes harder. That’s why you must have a clear exit plan that you can explain to the bank. In this case, the exit plan was to sell the properties and for Archie to continue working past 65.
3. The best time to plan for your retirement is today. While it’s excellent that Archie and Avril now have a plan for their retirement, it won’t kick in and fully support their lifestyle until Archie turns 74. Had they started investing 10 years ago, they would be able to retire earlier and likely with more money