Going for gold in retirement

Going for gold in retirement
29 July 2012

WITH the London 2012 Olympics underway, let’s take a look at how you can strive to win gold in your main event – your life or, more specifically, your retirement.

First of all, you need to decide how much you are going to need. Clearly, this is different for each one of us, but gone are the days when ‘two-thirds of final salary’ would suffice as an answer.

Stop thinking purely in terms of money and start considering what sort of lifestyle you desire first; then work back to ascertain how much it will cost you to live this lifestyle.

First off, think about at what age you would like to retire. By ‘retire’ I don’t necessarily mean a day when you stop working altogether, though this may be what you choose to do; I’m referring to a time when you are able to choose to work (and how hard you work) because you want to and not because you have to.

In order to be able to achieve this, you must have achieved financial independence – a point when you have sufficient savings and investments to allow you to survive financially without a job, even though you may choose to work to remain mentally active.

At base, you have two options about what your financial independence looks like:

1. GOLD: You don’t want to make any sacrifices in retirement

You’ve worked for a number of decades, you want to achieve financial independence with health, wealth and time in order to do all the things that you still want to do and to lead the lifestyle that you’ve worked so hard for.

2. SILVER: You make lifestyle sacrifices to be able to retire

You value ‘freedom’ above all else and are willing to live a simple life in retirement in order to retire as soon as possible.

Clearly, option one is going to be a lot more expensive to achieve and maintain than option two.

Arguably, there is a third option, though in my experience it is never a conscious decision.

3. BRONZE: You are forced to make sacrifices or work for longer

This is the path taken by people who aspire to option one – living the lifestyle they dream of – but have failed to make sufficient provisions.

These people are faced with a stark choice. Retire when planned, but vastly reduce their lifestyle expectations, or carry on working for any number of years until they can afford to retire in the style they desire, which of course may be never or when they are too old to really enjoy themselves.

This is a truly devastating and depressing decision to have to make. If achieving financial independence was an Olympic event, this in reality wouldn’t win bronze; it would entail limping out of the race.

How to go for gold

So, what does it take to achieving the gold standard of financial independence – living the life you dream of?

You first need to estimate what ‘your number’ is. This is the value of cash, investments and other assets that can be put towards funding your lifestyle. For example, your pension, investment portfolio and investment property can all be liquidated to provide you with an income to fund your lifestyle.

You shouldn’t include your home, which may make up a sizable chunk of your net worth, in this equation unless you intend to sell it and move into a smaller property.

Let’s say you calculate that you want to achieve financial independence at age 55 – by which time you'll have repaid your mortgage – and that you and your spouse need an income of $75,000 per year, in today’s terms, for living costs, holidays and entertainment. Obviously, this is going to need to increase with inflation because $75,000 in 30 or 40 years’ time, when at least one of you is likely to still be alive, will be worth a lot less.

Assuming you are 35-years-old now with negligible assets, what will it take to secure this? Firstly, factor in inflation – 3% per year is a fairly realistic assumption. That means you’d need an annual income of $135,458 in 20 years’ time to have the equivalent of $75,000 today.

So, how much do you need to save? It is a generally accepted rule of financial planning that it is sustainable to withdraw 4% per year from a lump sum, meaning, if properly invested, $100,000 would yield $4,000 per year with the principle remaining intact.

Obviously this isn’t particularly scientific, but by sticking with a figure of 4% we can make allowances for inflationary increases whilst allowing your disposable assets to diminish the further into your retirement you are.

This means you’d need to amass $3,386,450 and remember, that doesn’t include your main residence, or any other assets that you are unwilling to liquidate, only assets that you are prepared to draw down.

Assuming a rate of return of 7% per year, you would need to contribute $6,884 per month. Delay saving by five years and this increases to a scary $11,230 per month. However, start five years earlier and this figure is just $4,461.

These figures are quite daunting, but if you are serious about living the life you desire then the worst thing you can is bury your head in the sand.

Being realistic, it is unlikely that most people will be able to contribute so much in the early years of their retirement plan, but the important thing is to start as soon as you can. By doing this, you can start investing and get the magic of compounding.

The Olympics may come around every four years, but you only get one shot at getting this right.

Pic credit: freedigitalphotos.net

What sort of retirement do you dream of  gold? Or would you be content with silver? What are you doing to achieve it?

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Chartered financial planner
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