Why high earners can’t retire.

Recently I took part in a financial seminar. The presenter asked the 25 people the room a simple question: how many of us could afford to retire right now and live off their passive income.

Only three people put up their hands.

I was one of them and I know for a fact that I had one of the lowest incomes in the group. Many attendees earned very good salaries or owned successful businesses, but were unable to get off the financial treadmill. Why should this be?

If you’ve ever played Robert Kiyosaki’s Cashflow Game you will have an inkling. I call it ‘Monopoly on Steroids’ because it teaches many lessons about wealth. After playing the game many times I was able to predict that the person on the lowest income would invariably get out of the rat race first and win the game.

This is because low earners are forced to live within their means. They don’t develop a ‘spending lifestyle’. They minimise unnecessary expenses which is the first step to success.

The second step is to find investments that deliver income and then maximise the revenue you earn from them. Low earners who follow this path will end up retiring with more income than those who have enjoyed a lavish salary.

I can confirm this from my own experience. Newly divorced in my early 30s, I was left with just a block of downmarket flats in Christchurch with the minimum equity required to keep them. I was still an employee at the time, and to save costs I was flatting with a guy who has become a lifelong friend. By buying income producing assets I was able to start laying the foundations for financial independence.

Next I sat down and asked: what’s my financial goal? I decided on a dollar amount of annual income I wanted in retirement and calculated the number of rental properties I would need to generate that.

From then on my property purchases were based on the numbers. I looked at rental yield and the value I could add and worked out how much I would offer. Sentiment played no part.

This is a strategy you can follow for any income producing asset, be it residential property, commercial property, shares or a business. First put a dollar figure on the outcome you desire 10, 20 or 30 years from now. Then look for assets that can help you achieve your goal and only buy them if the numbers work.

The idea is to be in the happy position of raising your hand if anyone asks whether you have enough passive income to retire with the lifestyle you want.

Would you like to work with Sue on defining and achieving your wealth goals? . Get in touch.