Daily Equity Report
Seed Weekly - How Much Is Enough?
When people hear that I am a Financial Advisor the first question that is most often asked is, “how much money do I need to retire?” Unfortunately there is no easy answer to this question. There are basically three factors that need to be taken into account when determining “How much is enough to retire on?”
It stands to reason that the bigger your monthly budget the more capital you will need at retirement. If you are still paying off debt and still paying for children’s tuition etc. and have expensive hobbies like travel, helicopters or offshore holiday homes all of these factors will mean that you need a lot more money at retirement than (Joe stay at home) with no dependent kids and a paid off house.
The length of time that your money needs to last for is a critical component when determining how much money you need at retirement. Everything else being equal, a 55 year old with a 40 year old wife will need a lot more capital than an 80 year old widow. Because of the huge effects of compounding inflation, the longer the money needs to last (the younger the person is) the more capital is required to fund your retirement.
Obviously the higher your investment returns are, the lower your capital needs will be. It needs to be borne in mind, however, that higher expected investment returns are coupled at the tote with higher investment risk. Because most people have greatly reduced earning capacity after retirement, it is a lot more difficult to recover from financial mishaps. Because of this fact many people become too conservative in their investment approach leaving an impossible task for the Financial Advisor to create a viable portfolio. I generally find that most retirees can’t stomach the volatility in portfolios targeting in excess of inflation plus 5%, but that due to capital constraints, most need at least inflation plus 3%.
A 55 year old wanting to retire on an inflation adjusted income of R17 000 pm (until age 100) would need at least R5 000 000, whilst a 75 year old with the same parameters would only need R3 800 000.
A 55 year old wanting to retire on an inflation adjusted income of R30 000 pm (until age 100) would need at least R9 000 000, whilst a 75 year old with the same parameters would only need R7 000 000.
As you can see, with the large number of variables in play “How much is enough?” is not an easy question to give a blanket answer to.
It is important to get a handle on the three questions (how much do I need to live off each month, when am I going to stop saving, what returns am I going to target) to have a chance to getting a ball park idea of how much is needed at retirement. Once your target has been established you can make a plan to work to achieve it. Financial Advisors are equipped to not only help you determine a realistic target retirement pot, but also (more importantly) help you with your plan to get there.
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Tue, 30 Jun 2015- 10:26