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    Seed Weekly - How much is enough? (Take 2)

    Last year I wrote an article about how much capital a person would need to retire. At that stage I wrote the article because of how often I get asked the question – “How much do I need to retire?”

    Unfortunately, what I have seen in the last year is that not many people have read my previous article, because it is still the question I get asked most often.

    My general answer to this question is “how long is a piece of string?” Now obviously this answer is not satisfactory but it is probably the most correct answer because without doing an analysis of the three factors which determine how much you need to retire, giving a reasonable answer is impossible. Let’s have a look at each one of the three determinants separately:

    Monthly income needed
    This is the factor which most people should have the most control over, but where unfortunately a lot of people are living in a fantasy world. They have no idea of their personal expenditure. I recently did an analyses for a person who says that R 50 000.00/month is more than enough for them to retire on, if that was the case why can’t they then save R 70 000.00 a month when their take home income is presently R 120 000.00? In this case especially they will probably need more income after retirement than at present, because of their love of travel and the fact that they work very hard at the moment, and therefore don’t have the time to enjoy their holidays. When doing retirement planning I also find that husbands often have no idea about the cost of food and monthly living, and therefore also have very little idea about how much they need to retire on. In this regard a budget is an invaluable tool for both building capital and containing expenses.

    How long does the money need to last?
    Again with this variable, each person’s circumstances give very different outcomes. Obviously life expectancy is very important. Coupled with life expectancy is the age at which you are planning to retire? The difference in the needs between a person retiring at 55 and a person retiring at 65 is huge because a person retiring at 55 has 10 years less to save, his capital has 10 years less to grow and he is drawing an income for 10 years more than a person retiring at the age of 65. A second “problem” is the age of your spouse. Remember that ladies generally have a longer life expectancy than gentlemen. So if you have a wife who is 10 years younger than you, you will probably need to provide for an extra 15 years of income.

    Investment return
    It stands to reason that the higher the rate of your investment return, the less capital you will need to fund your retirement. The higher investment return does however come with a caveat, namely risk, because the higher the return needed, the more risk we need to take and therefore the higher the volatility of your investment will be.

    So to try and be less facetious with “how long a piece of string is”, I would probably use the following guidelines; if all things are equal, you don’t have an exceptionally young wife or an extremely low risk appetite for investments:

    - if you are retiring at the age of 55, you would probably need around 25 times your annual income needs as a capital base
    - If you retire at the age of 65 it would be around 22.5 times and
    - At 70 around 20 times
    - Put differently, a 70 year old should not be drawing an annuity of more than 5%

    Please remember that this “ball park guestimate”, is only that, and it doesn’t replace a proper analyses taking things like taxation, compulsory versus discretionary capital, estate planning or any other exceptional circumstances into account. You do need to speak to your financial advisor to ascertain whether your plan is on track or not.

    Kind regards,

    Barry Hugo

    Tel +27 21 914 4966
    Fax +27 21 914 4912
    Email info@seedinvestments.co.za

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    Permalink2016-09-27, 17:15:08, by Mike Email , Leave a comment
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