Have you noticed how some people always seem to have more money than others? They don’t necessarily have better jobs. Nor do they always earn amazing salaries. They just have more money.
But where... How... Did they get it?
Are you saving R3,000, R5,000 or R10,000 a month toward retirement right now?
How long will it take if you start saving that amount today, till the day you can retire?
So, let’s say you are saving R5,000 a month towards retirement.
You can get a return of +-11% a year on the money pre-retirement and only 7.5 post retirement, and inflation is 6% in the long run.
If you are 25, and want to retire at 65, you will have the equivalent income of +-R29,800 a month in today’s terms.
If you start saving at 30, your income will only be around R22,900 a month in today’s terms.
And if you only start saving at 40, you will have to live off a mere R13,126 a month if you want to retire at age 65!
This table simplifies it a lot. Obviously – if you have already started to save or you save more money, you will get to your retirement target much sooner…
But if you haven’t started saving yet, or if you save less money than this each month, you should seriously consider giving this some more of your attention.
Do you know how much income will be sufficient to live off, the day you retire?
If you don’t know how much to save for retirement, you’re faced with the very real risk of running out of the money you have saved for your retirement.
So how do you get this number?
Step 1: Calculate How Much Money Your Current Lifestyle Requires
This is called your Lifestyle Burn Rate (LBR).
This is the amount of money needed each year to enjoy your lifestyle. It’s easy to figure out. Simply calculate how much money you spend each month.
Your LBR is critical. You need it to know how much money you need to retire.
Example: Let’s say you currently spend R40,000 per month. That is, your LBR.
Step 2: Adjust Your LBR to Account for Any Spending-Pattern Changes in Your Retirement Plan
Remember the ideal retirement lifestyle you dreamed up minutes ago? Now it’s time to decide how much money you will be spending to live this way.
This is called your Retirement Lifestyle Burn Rate (RLBR).
To calculate your RLBR, start with your current LBR, then add any “extras” you want to enjoy during retirement. Next, remove any expenses you won’t have in retirement.
Let’s build on the above example. You currently spend R40,000 per month.
However, you expect to have your own property paid off by retirement, meaning no more mortgage payment and a monthly saving of R10,000. Now you know your ideal retirement scenario will run you only R30,000. That’s your RLBR.
Additionally, you can adjust this number for inflation. That ensures you get a more accurate idea of what to expect in the future considering high inflation in South Africa.
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Step 3: Adjust Your RLBR to Account for Any Additional Sources of Income
Now, say you’ve decided to retire and run a ramshackle bar in Ecuador.
The next step is to take your RLBR and subtract from it any income you are confident you’ll receive during your retirement. This income could include rental income from property you own or it could even be a small salary you receive from doing occasional consulting work or running a beach bar on the island you’ve retired to.
Slash that amount by 50% to be on the safe side. Now, deduct this number from your RLBR. The number you’re left with is your Net Retirement Lifestyle Burn Rate (NRLBR). This is the amount needed per year to live the retirement lifestyle you want.
Example: Okay, so you’re comfortable with spending R30,000 monthly during retirement. You expect to earn R10,000 per month running your bar. Now, to play it safe, cut that R10,000 in half. Deduct the remaining R5,000 from your initial R30,000. Your NRLBR is R25,000.
Step 4: Determine What Rate of Return You Expect to Get on Your Savings
Now, there is one last step before getting to your “Magic Number.”
It’s determining the rate of return you can expect to get on your retirement savings.
Let’s say your NRLBR is R40,000 per month. If your “Magic Number” is R9,600,000, that means you’re expecting to get only 5% on your money. (R9,600,000 generates R40,000 per month at 5%.)
Ten percent return on your savings would cut your “Magic Number” down to R4,800,000. Get the idea?
Step 5: Calculate Your “Magic Number”
Now you have what you need to figure out exactly how much money you need to retire.
Take your NRLBR and divide it by your expected rate of return from Step 4. Voila! The result is your “Magic Number”—the money you need to enjoy the retirement lifestyle you want.
Your NRLBR is R25,000. You expect to get a 10% return on your savings. Your “Magic Number” is R3,000,000. Once you hit it, you can retire.
How much money do you need to retire? A hundred grand? A half million? Ten million?
It is a very important question. Getting the right answer can determine how soon and how well you can retire.
Here’s to unleashing real value