HOW TO RETIRE RICH- 23rd October 2002

Peter Freeman - Bulletin

American tycoon John D. Rockefeller was reportedly asked on one occasion how much money was enough. At the time he was already one of the wealthiest men in the United States. His reply? "Just a bit more." While possibly apocryphal, this response nicely sums up one of the key personality traits of many of those who become seriously rich: a passion to become wealthy that is so strong that enough is never really enough. For this driven group of entrepreneurs, no matter how wealthy they become, the goal is never reached. There is always more money to be made.

Few of us have this sort of extreme financial passion, and the world is probably a better place as a result. Yet it is likely that many people would like to achieve the more modest goal of being able to retire rich. Not "filthy rich" but with, say, $2m or so in investable savings, perhaps a bit more. Enough, certainly, to support a comfortable lifestyle without having to work. The trouble is that few of us achieve even this more modest level of wealth, instead ending up at the end of our working lives with a much smaller pool of savings. For the bulk, it means they are dependent on getting at least a part pension. For others, their savings are sufficient to finance what is often referred to as "genteel poverty" – you aren't broke, and you aren't on the pension, but budgeting becomes one of your main concerns.

The question is why? Paul Resnik, a specialist in investment psychology and head of Sydney-based Resnik Consulting, says one of the main reasons is that most people lack the will to be rich. "You have got to want to build wealth from an early age if you are going to become rich, but no one explains things to you when you are young," says Resnik. While stressing that the life circumstances of some people are such that achieving wealth is extremely difficult, if not impossible, this is not the case with most Australians who are moving towards retirement, the bulk of whom had the ability to build up a lot more wealth than they now have. If they had started young they at least would have reaped the benefit of their returns compounding over time as each year's earnings were added to their existing pool of investments.

Ian Heraud, a highly experienced Melbourne-based financial planner who heads Heraud Harrison, agrees and cites as evidence the fact that he has, over the years, had quite a few clients who have managed to build up a disproportionately large amount of wealth despite having had only modest incomes. "I get clients who have quite modest annual incomes, sometime as little as $40,000 or so a year, but are really quite wealthy," says Heraud. "While there are a number of reasons why have they have been able to become wealthy, there is one that is common to them all – they have had a burning desire to become rich." Without this, he says, it is likely that, far from being quite wealthy, they would have been struggling to get by.

Another investment expert who highlights the importance of motivation is Peter Thornhill, head of Motivated Money. According to Thornhill, while it isn't necessary to have the mindset of a John D. Rockefeller, you have got to want to be rich – or, at the very least, much richer than most people. "Without this sort of motivation, you are likely to end your working lives with little more than the family home and a modest superannuation payout," he says. "Some won't even have this".

Yet while motivation is the essential starting point, a drive to be rich certainly isn't enough to ensure you reach that goal, however you define it. Those who truly want to be wealthy, in contrast to the vast bulk of people who occasionally just fantasise about being rich, will take action to translate their desire into reality. Heraud says that, in his experience, people who have built wealth, often despite having modest incomes, have not only been very motivated to become richer but share four other attributes (see left).

Heraud argues that, whatever the actual details of your strategy, it is unlikely you will be in a position to retire rich unless you are strongly motivated and have these four attributes. "People achieve their financial goals using a wide range of strategies but if you don't set yourself clear goals, start early and use part of your cash flow to finance gearing, the odds on most people becoming wealthy are pretty long," he says. This is true whether you focus on building investment wealth or instead devote your efforts to building a profitable business. Perhaps the strongest advocate of the second strategy is Robert Kiyosaki, author of Rich Dad, Poor Dad.

Two other American authors have also made a valuable contribution to the debate over what factors determine who becomes rich, and why most people don't. Writing in The Millionaire Next Door (HarperCollins), two US marketing academics, Thomas Stanley and William Danko, explain how their comprehensive study of wealth in America in the mid-1990s revealed that the rich often live in ordinary suburbs, drive modest cars and have frugal lifestyles. Like those cited by Heraud, the authors found a range of factors – in their case, seven – that appear to be common to people who become wealthy. Such people:

Live below their means, often well below.
Give priority to allocating their resources – money, time and energy – to efficient wealth creation.
Put emphasis on achieving financial independence and are relatively unconcerned about costly displays of high social standing.
Were not propped up financially by their parents when they were young.
Have children who, when adults, are quickly financially independent.
Are able to target money-making opportunities relatively astutely.
Choose the right occupation.

This last point is stressed by Brian Bissaker, general manager (product strategy) with Colonial First State, who argues strongly that successful wealth creation often depends on choosing both the right career and the right organisation. "Getting your career right is obviously important for a range of reasons but it is particularly crucial in order to be able to stick at something that gives you the sort of strong and reliable cash flow that is essential if you want to borrow to invest," he says. Bissaker adds that, if you pay attention to this decision, you give yourself the scope to exercise the financial discipline to start on a long-term savings and investment strategy from an early age. "Some people really can't afford to save but most can," he says. "Unfortunately most people don't save enough or leave it fairly late to start saving, which makes wealth accumulation a lot harder."
Richard Capel, senior financial planner with advisory group Arrive Wealth Management, says that, if he had to nominate just one feature as being the most important for wealth creation, he would choose a willingness to accept risk. "You are very unlikely to build up significant wealth unless you take risks," he says. "The important thing to remember, however, is that the main manifestation of risk, at least with a well-constructed portfolio, is performance volatility. The fact is that managing this should become a lot easier if you also adopt a long-term investment horizon, say, around 10 years or so. People who do this are more likely to stick with their strategy and so ride out market downturns."

The need to accept risk was mentioned by every expert contacted for this report. As well, it is given particular emphasis by one of this country's leading investment experts, Paul Clitheroe, in his latest book, Make Your Fortune by 40 (Penguin). The bottom line is that most people are unlikely to accumulate wealth – and certainly not by 40 – unless they are prepared to take on the risks associated with both borrowing and targeting assets that have the potential to deliver high growth over the longer term, such as international shares. Those who don't want to accept these sorts of risk will need to give themselves an even longer time horizon. While this can make good sense, it is obviously applicable only to those who start young and plug away at it.

Resnik says that, while there are ways to increase your risk tolerance, a person's basic attitude to risk seems to be a trait that can't be changed dramatically. According to Resnik, people who have difficulty handling risk are essentially allergic to volatility. Rather than dealing with this allergy by simply avoiding it, the better approach is to try and desensitise yourself to it through practice. What you need to do, he says, is first to understand that risk usually means accepting volatility then gradually add extra risk to your wealth-creation strategy, bit by bit, so as to build up your tolerance.

But while stressing that this sort of approach can help, he cautions that people who start with a low tolerance for risk will still continue to be pretty churned up by investment volatility and setbacks. "These people should just try to accept this and ride it out," he says. "They are also more suited to investments where changing fortunes aren't obvious day by day, which is the case with managed funds and even more true of property." In fact, it is likely that the appeal of property as an investment partly reflects the fact that price volatility is rarely apparent.

Thornhill argues that, in the end, managing risk comes down to emotional fortitude: once you have decided on a strategy, it is a matter of sticking to it and simply riding out any sudden turbulence. "Some investors are becoming emotionally pretty worn at the moment," he says. "My advice if you get hit by a fit of real concern is to take two aspirins, lie down and wait for the feeling to pass. In other words, learn to live with volatility and get on with your life. It's really the only way." If you can't, the goal of retiring rich will be hard to achieve. This is especially so if, like most of us, you failed to get started on the road to wealth when you were young. Unfortunately for us, it is not just a matter of time not being on our side, it is actually playing for the other side. Unless we are prepared to take investment risk, the chance of success is slim.


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