Could you retire if you won $1 million?

RICHARD MEADOWS
Last updated 05:00 27/11/2013
Money
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MILLION-DOLLAR QUESTION: If you won the Lotto overnight, could you actually hand in your resignation first thing tomorrow?

What would you do if you won lotto?

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Awoken from a cryogenic slumber, Austin Powers villain Dr Evil threatens the planet with nuclear destruction unless he is paid a ransom: One million dollars.

The assembled world leaders collapse into laughter, opening their wallets to pay it on the spot.

''A million dollars isn't actually a lot of money these days,'' the doctor's henchman whispers to him hurriedly.

It's a big, beautiful number, but $1 million just ain't what it used to be.

The ravages of inflation mean the millionaire of today would only be worth the equivalent of $700,000 in the year 2000.

If you turn back the clock to 1980, he or she would be worth a paltry $200,000 or so.

This year, finance gurus overseas have been getting themselves in a flap over whether or not seven figures is still enough to actually retire on.

The million-dollar question is this: If you won the Lotto overnight, could you actually hand in your resignation first thing tomorrow?

We won't keep you in suspense - the short answer is yes.

There are, however, a few big buts attached.

For the sake of argument, we'll say you don't spend a cent and instead wisely invest the million in a mixture of shares and bonds.

AMP Capital's head of investment strategy, Keith Poore, reckons a balanced fund could earn you about an average 6 per cent return, after fees and tax.

That would give you an annual income of $60,000 without even having to dip into your original million - not too shabby.

But you have to remember that inflation is constantly chipping away at the ''real'' value of that $1m.

Modern medicine means we're clinging to life longer than ever, and a million bucks could be practically pocket change 50 or 60 years from now.

Poore says if you factor in inflation at 2 per cent, you'd only actually be able to safely draw down about $40,000 each year.

''Essentially what a million dollars gives you is the median income, if you want to maintain the real value of it,'' he says.

''Some people might pop corks over that, and others might not.''

So the first caveat is that it depends what sort of lifestyle you want to live during your golden years.

Authorised financial adviser Jeff Matthews has written about the huge savings required for retirement in the past, and has been greeted with howls of outrage from those who claim they can live off the smell of an oily rag.

''A million bucks sounds like a lot of money, but it's not really,'' he says.

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The level of retirement income that people want is very much a personal issue, tied to their own wants, needs and circumstances.

Matthews reckons $50,000 a year is pretty much the bare minimum you'd want to be getting by on.

Some of his clients are drawing down $10,000 a month from their portfolios- plus extra lump sums here and there for various purposes.

He says a lot of people underestimate the cost of the retiree life.

''When you start tallying it up, it's way more than people think.''

Things like insurance, rates and repairs and maintenance are a constant drain.

Work-related costs drop off, but others take their place.

''Your expenses become different expenses- they become hearing aids, glasses, other kinds of medical procedures,'' says Matthews.

The other major factor is how many years you need to live off the original $1m. 

If it dropped into your lap as a fresh-faced 25-year-old, you wouldn't have much prospect of stretching it out over another 60-odd years.

Matthews calculates a young'un would need a lump sum closer to $1.5 million to maintain that basic $50,000 annual income for the rest of their life.

A 65-year-old, on the other hand, will be in a much better position to put their feet up.

They only have to last 20 years or so, meaning they can start eating away at their savings if they want to, even though it will cause their income to drop.

But they also receive a NZ Superannuation top-up- $18k for a single person, or $28k for couples.

When you combine that with Poore's suggested $40,000 income withdrawal, it totals close to $60,000 to $70,000.

''Adding the New Zealand Super on top would make a bit of a better proposition,'' he says.

The final big ''but'' is that all of this plotting and scheming assumes the lucky recipient of the cash already owns a freehold home.

For our 25-year-old, this is highly unlikely.

You'd barely have enough money left over for a bus fare if you dropped a million bucks on an inner-city Auckland home right now.

Even if you only spent half a million, you'd still need to keep working for years to come.

Again, this as much a lifestyle choice as anything else. There are plenty of towns outside the main centres with reasonably priced housing where you could while away your days.

Although the New Zealand property market is not exactly cheap, there's one area where we can feel a little more cheerful than our overseas brethren.

The reason foreign finance gurus are losing faith in the million-dollar retirement plan is because the investing landscape is so grim.

Fixed interest investments, like bonds, are a mainstay of retirement funds, because of their regular income and perceived safety.

However, bond yields have tanked in recent years, meaning it's getting harder for retirees to eke out a decent income.

Savers in the UK are getting close to zero interest on standard bank savings, even while inflation is chipping away their balances at 3 per cent a year.

''It's quite a different story in New Zealand, compared to those places,'' says Poore.

On the face of it, corporate bonds issued by the likes of Fletcher Building a few years back have slipped from coupon rates of 8 or 9 per cent, to trade on a yield of about 5 per cent.

Poore says ''real'' bond returns have slipped a bit.

But once you adjust for inflation, it doesn't look so bad.

''Investors need to remember that yes, you were getting a higher rate a decade or so ago, but inflation was also higher as well,'' he says.

Five-year New Zealand Government bonds are still paying out about 4.3 per cent, compared to the US government's paltry 1.3 per cent.

So it's not all doom and gloom.

Sure, winning or even saving a million bucks isn't going to set you up to enjoy pool-side pina coladas for life.

But it's still a huge milestone to reach, and means you could technically retire if you were willing to adjust your lifestyle drastically.

Otherwise, it's on with the shirt and tie, and back to the daily grind.




- Fairfax Media

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