Lifestyle Design
Ever felt trapped in an unfulfilling life with little idea how to change it?
I have always had this curiosity about a concept I call lifestyle design…
Why should your life be unfulfilling if you have the earning potential and balance sheet which allows you to live a far more fulfilling life?
I am 33 years old, my father died at 49 years of age due to cancer… It is possible that I may have already lived 2/3rds of my life. No surprises then that I am passionate about living life to the full.
Why aren’t people (with the financial ability) making more informed and deliberate decisions about how they spend their money (and time) to give them maximum fulfilment in all aspects of life during their time on earth?
Why do some work their 9-5 job with little satisfaction/fulfilment all the while it is possible to make a lifestyle change using your current assets and income more effectively in order to live a more fulfilling life?
Simple answer, they lack the understanding and confidence to know what is feasible in order to have the confidence to make these decisions.
With more than 10 years’ experience in assisting my clients with their financial planning, and this passion for lifestyle design, I have developed a planning tool which – together with coaching assistance from me – aims to give my clients the confidence to make decisive decisions about the lives they want to live.
I have dubbed it the ‘Lifestyle Audit’.
HOW?
The exercise initially requires you to simply capture information regarding your assets/liabilities, and your income/expenses. The information at the end of the exercise is eye-opening for 100% of clients to date. However, the value really comes in when we analyse the results, identify trends in how you are spending your income monthly and opportunities where value can be created, often without increasing your monthly commitment/expenditure in your financial plan.
High level, the exercise looks at the below factors, and depending on where you are in your life’s journey, the areas you would focus on will differ.
1. Consolidated view of your Assets and Liabilities, illustrating your Nett worth.
Which assets are income generating? Which are lazy assets? Which are lifestyle assets?
If an asset is realised (sold, converted into cash), what sort of sustainable income can the capital provide?
This is an extremely important concept, linking a capital value to a sustainable monthly income over a period.
When lifestyle designing, income is key… You can’t pay for your annual airfares to visit your children abroad with an asset that generates no income, and if that asset is not adequately appreciating in capital, you need to reconsider its suitability in your portfolio.
For investors in the earlier stages of their lives, your nett worth needs to trend upwards, seems obvious, but sometimes this is unknowingly not the case. Revisiting the exercise is a good check and balance to ensure you moving in the right direction.
2. Analyse how you are currently spending your monthly income.
This exercise breaks down the old school budget into categories which are easier to manage.
How much goes towards insurances/medical expenses, to paying off debts, to Investing and lastly to your monthly living expenses.
i.e., what is your savings rate? What percentage of monthly income is saved? Often, our savings rate is lower than what is required to reach our goals. At least know where the goals are, and make smarter, more informed decisions upon receiving your next increase or bonus.
I can identify where an insurance/medical rate has a bit too much ‘fat’ on it and can be reduced allowing you to save more or pay off your debts quicker.
Lastly, it will identify what your current disposable income is, i.e. If you are running a budget surplus, you should be investing the surplus or paying off debt faster. If you are running a deficit, then serious action needs to take place immediately.
3. Your ideal lifestyle budget.
Quite often your ideal lifestyle budget is very different to your current monthly budget, and often it can be less for various reasons.
If it is retirement that you are aiming for, or you are itching for a change of scenery in your working life, perhaps a move to the coast…
You need to know the required budget is feasible before plucking up the courage to make this lifestyle change. Often, it is a lack of courage which holds us back, because making a change is not easy. Being confident about the financial feasibility may just give you the extra bit of courage required.
I find it fascinating that when consulting with newly retired, or soon to be retired clients, a large focus is always on the required monthly income, and when we go through their budget with a fine-toothed comb, it’s strange how certain expenditure items are suddenly wasteful and unnecessary. I find myself asking the question, why realise this at this juncture of your life, instead of 10-15 years earlier when you could have saved that expenditure throughout the period leading up to retirement and been far better off as a result? This is the impact of marrying your current budget to your desired lifestyle budget.
By understanding your current budget, you improve your ability to accumulate wealth more efficiently by identifying unnecessary/wasteful expenditure.
Use your current budget to construct your ideal lifestyle budget. Again, you will likely identify more unnecessary expenditure in your current budget. Fix this and improve your wealth trajectory.
Understanding how your balance sheet can work more effectively to attain the income required for your ideal lifestyle, more about this below… This ideal lifestyle can be far closer than you might have imagined, and you will have newfound confidence to follow your dreams.
How do you equate Capital to income?
The larger your income requirement is, the larger the sum of wealth you require at retirement.
Actuaries suggest that when you retire, a sustainable income drawdown in your first year is 4% per annum.
It’s relatively simple: You add up all of your investments and withdraw 4% of that total during your first year of retirement. In subsequent years, you adjust the Rand amount you withdraw to account for inflation (i.e., increase the annual drawdown by the inflation rate experienced). By following this formula, you should have a very high probability of not outliving your money during a 30-year retirement, according to the rule.
What this means is, if you retire with R10 million today, a sustainable annual income on year 1 is 4% of R10million, = R400,000 per annum = R33,333 per month.
Seems extremely conservative, but the risk of running out of money is an important risk to manage.
In South Africa, if you run out of Money, your budget needs to adapt to the +-R1,800 per month old age pension. There is no safety net for running out of money (unless your planning never included selling your home, which you can sell, invest the proceeds and live off the capital).
While the 4% rule is a reasonable place to start, it doesn’t fit every investor’s situation.
I struggle adopting this rule hard and fast. It assumes the income in retirement will retain its real value throughout the entire term. I prescribe to the idea that when I retire, I will need a larger real income in the initial 10 or so years when I am physically more able to travel, go on hikes, play golf etc. I don’t believe I need the same income between the ages of 85-95 for example. To me, I am happy to accept a life of Internet (not newspapers 😊), Coffee and hopefully teasing my grandchildren. If I am physically able, I accept my decisions to enjoy my years when I had no guarantee of my life expectancy and physical ability.
Because of the variations of people’s circumstances and risk tolerances, my exercise equates the income need into capital by simply using 3 different drawdown rates, a 4%, 5% and 6% drawdown.
i.e. If you needed R33,333 per month, annually this equates to R400,000 per annum.
Using the drawdown rules, the capital required to fund such an income using the 3 drawdown rates mentioned is as follows:
4% – R10,000,000
5% – R8,000,000
6% – R6,666,666
These drawdowns still assume a 30-year life expectancy, and so would not be suitable for a lesser term. They are labelled conservative, moderate and aggressive, but one might say that a 6% drawdown is hardly an aggressive strategy.
This is why the lifestyle budget needs to be accurate…
If you rework your budget and reduce the income requirement from R33,333 to R28,000
The Capital Required based on the 3 drawdowns used reduces as follows;
4% – R8,400,000
5% – R6,720,000
6% – R5,600,000
What is clear is that there is no one-size-fits -all approach here.
If you are happy for your income to reduce in real terms throughout the retirement years (like in my example with initial years being more active), the capital required will be much less as well.
I am certain there are people out there, slugging about their daily mundane routines with minimal sense of purpose, who could possibly break away and live more fulfilling lives if they understood the mechanics of what is possible.
My takeaway, it is never too early or too late to do this exercise. One does not simply arrive at ‘retirement’ and have their second innings planned out for them. Its up to you. Take the steering wheel.
Disclaimer: You don’t need to be an excel wiz! It is very simple and extremely insightful, and if there was one thing you used Excel for this needs to be it.
Please pop me a mail at lee.oosthuizen@liblink.co.za if you would like to me send you the Lifestyle Audit Excel document.