A common understanding of retirement is: a time when we no longer need to work; spending our time doing anything we see fit. In this day and age, there will always be bills to pay and very few things are free of cost, so a source of income throughout our lives will be essential. With the “Baby Boomer” generation expected to heavily load government expenditure in their retirement years, government support is becoming a much less feasible means of paying the bills after retirement. Families need to prepare to support themselves in their retirement years and provide their own source of income, ideally without needing to work. Let’s look at how we can achieve these results within just 10 years.
Our goal is to create a source of income, which continues indefinitely without needing daily time and effort. This requires owning some form of asset which returns a profit and allows us to live the life we want from it. Building a profitable asset simply by saving our hard earned money is not functionally possible for most of us. In order to build your personal wealth to the point where you can retire, you need to invest your money and leverage this money to build your net financial position much faster. Remember that this investment strategy works over time and only starts when you begin.
Let’s look at the Matrix below:
This matrix assumes that an investor starts today using $40,000 of savings to purchase their first, well selected investment property worth $400,000. The purpose of investing is to leverage your upfront investment to grow your wealth without you needing to sacrifice your time every day to make it happen. We have assumed a fairly conservative growth rate of 6% for our investments. This growth is when the power of leverage begins to show profits. One VERY important fact is that we have assumed a 6% growth per year, which is very achievable however there are many investments out there that do not achieve this. Careful asset selection is at the heart of property investment.
After one year of growth our investor is able to purchase a second investment worth $400,000, but this time they only need $20,000 in savings.
Different people have different lifestyles, varying levels of motivation for getting results and most commonly, different comfort levels around taking risk. In order to reduce our risk we have taken a break, allowing our two assets to grow in value for a year without making any more purchases. A more aggressive investor may choose to skip this step.
By the end of 2016 the investor now has the ability to purchase a third asset worth $500,000 with zero dollars of savings! Please notice that throughout this process our investor would still be working their job and may be able to pay down some debt. For the sake of simplicity we will assume the investments will make no further cash injections into their investments.
The following two years our investor is able to use just the equity growth from their previous investments to purchase new investments. All of this has been made possible by investing a total of $60,000 savings as deposits. Should this investor choose to let their investments grow from this point, we have achieved what we refer to as financial freedom. Note that between 2022 and 2023 our investor’s net equity position grows by $199,376! With a net equity position of $1,282,318 (this is what is left after you pay off your loans) our investor has many different options for how to live off of their equity. This is where actual retirement is achievable; cash flow without work.