How much retirement income will you need?
Retirement planning involves calculating what level of income is likely to be required at a specific date in the future and the sum of money that will be necessary in order to provide this income. It is advised that 2/3 of present income should be considered as a reasonable level of income during retirement years.
There are two ways in which to calculate the amount of money that you require. Plan for 25-30 years of retirement, the flaw in this calculation is no one can say how long they will live. The most common way is to take the assumption that you will purchase an annuity (annual income). If you are planning for the annuity route then this is building a large enough sum of money in the future that you can generate an income via investments.
Below is an example of a 40 year women with a desire to retire early at age 60.
|Lump sum required||$600,000 (assuming a 5% return/income drawdown|
Now an important factor to consider here is that we are working on the principle that you are retiring today. We need to factor in inflation which will vary from year to year, however history tells us that inflation in the western world grows at an average of 3% per annum.
The above example adjusted for 3% inflation
|Target income at 60||$62,215 per annum|
|Target fund required at 60||$1,083,700 (assuming 3% inflation)|
Saving $1,892 monthly may total $1,083,700 in 20 years based on 8% per annum growth!
When should I start a retirement plan?
"Nearly half the working population is not saving enough for retirement, and one fifth is failing to save anything at all, according to a major study on pensions!" Now you may not have to rely solely on your own personal retirement plan but the above figures highlight the importance of a) starting a plan and b) starting the right plan for you.
- Identify your personal goals
- Optimised portfolio for growth, income or protection
- Initial risk assessment to determine your profile
- Taxation in your country of domicile and residence
- Find the most cost effective solution
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