Trying to build assets in order to retire may actually force you to work longer

There’s a trap many people fall into when building wealth or planning for retirement. Here’s how simple strategies trump complexity.

There is a common mistake most people make when thinking about how to build their wealth. Picture: iStock

The most common financial mistake most people make is overcomplicating how to build wealth, says financial adviser and popular social media commentator James Wrigley.

Some try to set up trusts or add another investment property to chase negative gearing but in reality the solution may be far simpler. Overcomplicating things can harm wealth rather than build it.

“We’ve had meetings with people that in the last couple of years of their working life they’ve decided to go and buy another investment property,” Mr Wrigley told The Australian’s The Money Puzzle podcast.

“How are you ever going to pay off the debt associated with this property? They’ve bought it just because of the negative gearing benefits to try and save some tax without actually thinking that step further to say, well, how can I retire when I have all of this debt associated with the property?”

Too many people focus on the assets and not the cashflow.

“It’s trying to get people around to this mindset of, when it comes to retirement, it doesn’t matter quite so much what the value of all of these assets are that you own.

“What matters more is your ability to get your hands on some cash to spend when the fortnightly or the monthly pay stops being dropped into your bank account. So you might have this great big pool of assets, but if you’ve got too much debt associated with it, any income you’re generating from those investments just goes to paying off the debt and there’s nothing left over for you to spend, and so you can’t retire.”

Financial adviser James Wrigley warns not to get trapped by being asset rich but cash poor

Consider how you want to retire

Mr Wrigley has written his first book, Retire Life Ready, which is released on October 29 and details a framework for people to better plan their retirement, or to at least plan for a good retirement.

When he shared with his family that he was planning to write a book, after being approached by publishers a year ago to put his plain-speaking advice into a book, his aunt offered up a sage piece of advice.

Mr Wrigley said she told him: “James, make sure you tell people that if they don’t have any money in retirement, that retirement’s really boring.”

He agreed she had a point.

“She was trying to emphasise this point of if you’re just stuck at home watching the clock tick down, it’s not a terribly great retirement.”

So, how do you plan to provide a good retirement?

Mr Wrigley said more people were starting to consider in their 40s how they wanted to retire, whereas 15 years ago people waited until their mid-50s. The earlier people planned for it, the better, he said.

Mostly, people are “petrified of running out of money”.

To plan for retirement, he encourages people to track their current spending and to draw lines through things that shouldn’t exist when they’re finishing work, such as the mortgage. This is why, he said, people should focus on paying off the mortgage.

Once there’s an income target he applies “the rule of 20”.

“If you wanted to live off $100,000 a year, multiply that by 20, which is $2m,” Mr Wrigley said.

“You want to have your house paid off and $2m worth of other assets to support that retirement. Now, not a whole lot of people will get there. Certainly plenty of people do, but not a huge portion of the population.

“If you get to that level, you’re at a level where it’s highly unlikely you’ll spend your money through retirement. You’ll mostly be just living off the earnings of your money, and then it goes in inheritance.

“Now, if you’re 15 times, or less than 20 times, you get this kind of slowing, you get this curve of you’re slowly eating into your capital, which is fine. That’s the reality for most people in retirement. And then eventually later down the track you qualify for some age pension factored into the equation.”

But what can happen is people worry too much about eating into their savings, instead only living on the earnings generated off their investments.

Plan for a break in your leisure time

Another key component of planning a good retirement is to consider what you may want to do to break up all that time lying on the beach, unless that’s the ultimate retirement for you.

“An old colleague of mine in financial advice used to talk about this idea of what do you do with your time in retirement when all of your time is leisure time?

“At the moment, leisure time is a break from work, a break from the routine. But what do you do when all of your time is leisure time?”

People could consider part-time work, casual work or volunteering or any activity that kept them connected socially and their brain ticking over.

Focus on the mortgage but not at all costs

Mr Wrigley said while it was important to focus on paying off the mortgage, people should strike a balance between repayments and finding additional cashflow to fund investments.

“The growth return and the compounding you get on investing that dollar is generally better than the interest saved on the mortgage,” Mr Wrigley said.

“Now, it’s not all of one or all of the other, but for most people it’s a balance of both. But we see a lot of people that have just paid off their mortgage and have done nothing else.”