Ask Paul: Have I invested my money right in case I die at 65?

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Dear Paul,

I'm confused or just nervous. I'm a 43-year-old bloke with a wife and two older teenage handbrakes. A large percentage of my male family members die at retirement age around 65, so I have come to the conclusion there is a possibility that I could be the same. I'm not saying I'm giving up, I am taking the relevant medical precautions, exercise, etc.

Due to this, I want to postpone work for 10-15 years and spend some quality time with my family, tick some off the bucket list, and just slow down.

paul clitheroe ask paul matt

I just need someone to tell me I'm doing the right thing and my family will be fine, if something may happen to me. I have life and TPD insurance inside and outside of super.

We have taken my financials to a financial adviser and I just felt they are trying to sell me something - $7500 start up with a yearly fee of 2% of money managed by them paid monthly, regardless of performance. 

So I decided to do my own calculations, with help from my accountant, after the sale of our business, pay our taxes, no debt plus money we have saved and invested in various funds and shares, we should have $1.4 million, $610,000 in super, and own my house and property valued at $1.3 million. 

We can continue to invest and make 3% on our money, 4% on super, spend $89,000 a year and increase spending by $3000 every five years. In a few years we downgrade our home, buy a caravan and vehicle, drive into the sunset and invest the remainder. By my calculations we will still have more than $400,000 when I'm 84 and not worked for 40 years. 

Have I worked this out right or am I totally wrong and need to work for a while longer? - Matt

Matt, you have made my day. This is just fantastic, I love seeing people make solid decisions about their work/life balance, take into account family health issues, become their own financial planner and get on with it.

My suspicion is that by reacting to your male family members dying early, exercising, seeking medical advice and so on, you may have a long life in front of you. Who knows, but I prefer your approach!

Let's do a quick fact check. You have $2.7 million in total assets, including your house. You have already told me that you are happy to sell the home in time to come, so I can include that as an investment asset, but one that is tax free on sale as your family home.

So, to spend around $90,000 a year, the return required on $2.7 million is a bit over 3%. This can be capital growth or income, basically that is the total return you need, plus inflation to keep your capital in line with inflation. At the moment inflation is negligible, so let's say you need a total return of 4.5%. If inflation kicks up, your assets, in particular property will rise with it, so that is a "self-balancing" factor.

What are your chances of earning 4.5% on a well-diversified pool of assets? History says very, very high. Sure, we could get hit by an asteroid or World War III breaks out, but this is a conservative return on a big pool of good assets. I hold a similar mix and I expect average returns over a decade or more of closer to 8%. I should throw in here that a $7500 start up fee, plus 2% a year is downright ridiculous in this modern world of technology and low costs.

So my only real debating point with you is I think you are being a little too nervous. Must say, being conservative and nervous is a good thing, but not so much you get paralysed. So, my summary points:

  1. A total return of 4.5% on a pool of diversified assets is very conservative.
  2. With your spending plans of around $90,000 on an asset base of $2.7 million, I suspect you will die a rich person
  3. You don't need an adviser. You are one, but keep cross checking with your accountant.
  4. No guarantees of how long we will live, or asteroids, but you have a great pool of assets. Get going with your plans.

Do drop me an email in a few years if you can. Your story is a cracker and I would like to hear how it goes.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to email Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.