If you're approaching retirement, it's likely this question is keeping you up at night.
It doesn't really matter if you're wealthy, comfortable or just making ends meet. When you get to retirement age the world changes.
In the course of my life I've worked with high-flying executives living what can only be described as “the dream”. Owners of multiple businesses, in multiple countries. CEOs with kid's in ivy league schools overseas and a trail of ex-wives. I've worked with widows grappling with the reigns of an inherited business and retired tradesmen who diligently pinched every penny as they prepare for the future.
I've worked with tech entrepreneurs and trust fund babies with squandered fortunes.
And, I can tell you, no matter who you are, when the time comes the only question you'll be trying to answer is: Will I have enough money to support myself after I retire?
Today, I'm going to attempt to help you answer the impossible.
But, before we begin, a word of warning. Your retirement can last a very long time. Several decades. No financial professional should ever be so arrogant as to believe they can predict outcomes over such a long period of time.
However, the guidelines I will give you today have proven themselves in the past and will hopefully still be useful going forward.
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How should you be thinking about your retirement funds?
You can think about your retirement funds as having two components: Inflows and outflows.
Inflows: How to increase the size of your retirement portfolio
When you’re retired you have just one significant inflow: Growth.
If we consider historical risk-adjusted performance, you could potentially aim for between 10% and 13%.
But, unfortunately, past performance is no guarantee of future performance.
Critically, your growth rate also depends on the level of risk you’ve decided is acceptable for you to invest at. And, depending what you invest in, you could have significantly different outcomes.
When it comes to retirement, many people become far too cautious, not realising that most of the growth in your savings should occur after retirement.
It’s a tight balancing act. You will need to protect capital, but at the same time ensure you can generate an income large enough to cover your outflows.
Outflows: How to protect the value of your nest egg
In retirement, outflows are a fact of life.
When you retire you are going to drawdown on your portfolio.
But the most significant outflow is not going to come from your withdrawals. It’s actually the silent thief they call: Inflation.
Inflation - This is not only the most important outflow consideration but it’s also the least certain. Currently, the South African official inflation rate is 4.5%. But, even if you trust government’s calculations, the 4.5% inflation number applies to the entire country, not to you in particular.
Every person has their own inflation rate depending on the goods and services they use.
• Do you have higher medical bills than others?
• Are you planning on travelling overseas during your retirement?
• Do you still have dependants even though you’re no longer working?
I would recommend adding at least an extra percent to your personal calculation, just for safety. But you also need to realise that your inflation rate will change over time as well.
Costs – This is the price of your “route to market” and it’s also incredibly important. These costs include advice, platform and asset management fees. You may also be paying accounting/legal fees, structuring fees, performance fees, asset swap fees and implementation fees to name just a few. If you can’t tell me right now what you’re paying in fees, you MUST check what your total costs are by requesting a statement as a matter of urgency.
IMPORTANT: Do not just rely on your advisor’s assurances.
You should not be paying more than 2.5% per year in costs. That said, I have seen substantially higher numbers on many clients. If you have trouble finding the total cost, send me an email on email@example.com
and I will personally assist you in analysing your current fee structure.
Withdrawals – Historically you’ve been able to draw as much as 6% a year at the start of your retirement and been reasonably confident that your funds will last at least 20 years. This translates to about R5000 per month for R 1 million you have saved.
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How much will you need?
You’re the best placed person to understand how much you need per month to live off.
Depending on your current expenses, you can work out a reasonable withdrawal based on the numbers above.
That said, many retirees envision cutting their spending drastically after they retire. I have seen clients who aim to live off 33% of their pre-retirement income. In most cases this is totally unrealistic. Your spending tends to track your income. If you have become used to a certain level of spending, cutting back too much will be far more difficult than you initially imagine.
As a rule of thumb, you can cut down to around 70% of pre-retirement levels without changing your lifestyle dramatically. Cutting to less than 50% will make you feel substantially poorer.
It doesn’t matter whether you’re the high-flying businessman, the frugal engineer or a divorcee living off a settlement. To calculate whether or not you have enough, you’ve first got to realise that working with exact numbers is dangerous. A small tweak to your model, combined with compounding, can result in drastic changes to your potential ability to drawdown on your investments.
I can run your current figures though various scenario planning tools, but the most successful retirees treat the whole experience as a journey. It’s like sailing a ship, currents may push you back and forth, but if you keep an eye on the destination and continually correct your course based on your realised performance, changing inflation and actual withdrawals, you’ll be just fine.
That said, I would recommend using a financial planner when it comes to retirement. As you retire, you’ll be entering a period of your life in which you will not easily be able to recover from mistakes. If you would like me to take a look at your current retirement plan, feel free to email me on firstname.lastname@example.org