When you’re calculating how much capital you need to retire on, take care because the assumptions we use for post-retirement costs may be much different to your current pre-retirement costs. Your basket of goods changes and research in the US has shown that inflation for retirees over the past three decades has been higher than the general CPI.
One thing that won’t change is that life will throw up the unexpected during your average 30 years of retirement, just as much as it did in the previous 30 years. Retirement is inevitable – you must decide if it is to be forced or planned. We know it’s comfortable only for a few South Africans.
Calculating retirement costs can get very sophisticated and complex. There’s CPI and risk-adjusted returns, actuarial life expectancies, lump sums or annuity payouts, tax efficient structures, and all sorts of combinations of these. Alternatively, you can go with one of two tried and tested rules of thumb: either you need 12 times your final annual salary, or a replacement ratio of 70–80% of your income, in each case for 30 years.
In either option, it is a function of how you want to live: it’s the personal decisions that count. For instance, we know that houses and cars are the “whales” of our finances, consuming much of our financial resources. Significant questions to pose include: are you looking for an exotic retirement villa and multiple homes, or can you downscale to a smaller, functional home more appropriate to your retirement lifestyle? How many cars will you need to fuel, service, insure and garage? Need they be luxury sedans, campervans, or economical runabouts?
Some of these expenses may disappear or reduce in time, but some will increase. The early years of retirement are typically filled with energy, curiosity and often expensive world travel. However, as one gets older, declining energy and mobility means less travel but higher medical costs, which ultimately are potentially crippling.
I’ve always been an advocate of a planned and structured approach to investing for retirement. However, we each have a personal view of the lifestyle we aspire to, tempered by affordability and the practicalities of that dream. The numbers are the easy part: I urge you to map your plan with a good coach – but the real challenge is sticking to it.
Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning
