But looking forward it’s harder to see the same thing happening in 20 years’ time. It’s obvious when looking back … just think about how big a 50c lolly mixture was when you were a kid, and how puny they are now. Inflation is an odd concept for many people. Multiply that by 25, and you will need $1.86 million of debt-free assets to generate that passive income. So how do we do that? To keep it simple, you can use an inflation calculator like the one below.īut, as an example, if you want to build a passive income of $50,000, and you want it in 20 years, then you need to aim for $74,297. Once you’ve done that you can divide the new number by 0.04. So you first need to figure out: “How much income do I need in the future to buy the equivalent of $50,000 worth of stuff in today’s money”. That’s where you can use property investment to get to the point where you do have the assets you need. If you’re like most people, you’ll be thinking “OK, that’s great … but I don’t have $2.5 million of debt-free assets!” That means that after your $2.5 million of high-yielding property has paid rates, insurance, maintenance, body corporate and any other expenses, you make $100,000 every year before tax. Once you divide that by 0.04, you get $2.5 million of debt-free assets. To give a worked example, let’s say that you want an annual income of $100,000 in today’s dollars (more on that below). That will give you the level of debt-free assets you need. 4%, or the equivalent of multiplying the figure by 25). So, how do you calculate the level of assets you need?įirst, take the annual passive income that you want to live on. If you own properties that are highly geared, then the interest costs will take away most of the income you would otherwise enjoy. Said another way, you need to have a lot of equity in your properties. That demonstrates that if you want a decent passive income, then you need to own properties with very little debt secured against them. Watch our video below which explains the possible difference in returns between shares, property, managed funds and term deposits. We tend to find that many Kiwis when weighing their options will opt for property which has that mix of yield and income security. In this case, your income will be totally predictable, and for that you’ll accept the lower yield. Similarly, if you are very risk-averse, then investing with a bank may be the right fit for you. As part of seeking those higher returns, you’ll accept that the passive income you get from your dividends will go up and down each year and frequently change. If you are more risk-seeking, then you might be willing to seek the higher yields that shares can bring. This makes it a good option for people who are willing to take a moderate amount of risk. The right asset class for you will depend on how much risk you are willing to take.įor instance, although property is not always the highest yielding asset class, it does have a mix of yield and stability of income. If they stop paying you have the ability to replace them with a tenant who can make rent, and the original tenant will still be liable for what they owe you. Tenants, on the other hand, will continue to pay their rent because they still require a place to live. However, after the Covid-19 induced shutdown and the closing of New Zealand’s borders, it is now unlikely the company will pay out a dividend for many years. In the 12 months to December 2019, the company had the highest yielding stock at 16.42%. They will change based on each company’s performance.Ī good case study for this is Air New Zealand. So the benefit of shares is that if you focus on higher-yielding stocks, the dividend yield you can get is likely to be higher than property in some years. The average yield was 3.39% for all shares, and 5.35% from those shares that paid a dividend. Of those that did pay a dividend, the yields ranged from 0.31% from Allied Farmers, all the way up to 51.72% from Sky Network TV.
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