Estate Living Magazine Design for living - Issue 42 June 2019 | Page 22

P R O P E R T Y
&
I N V E S T M E N T
RETIREMENT
HOW MUCH IS
ENOUGH?
Planning for retirement can be both exciting and
scary. Exciting in the sense that you’re planning
for a life event that is spoken about so often
throughout your life that it’s really a milestone
and period to look forward to. Scary though,
as you never know whether you’ll have enough
since it’s impossible to predict the future. So
much could go wrong in our economy and even
if you’ve invested offshore, nothing is certain.
But it’s not all dancing in the dark. There are some ‘rule of thumb’
calculations to help you plan for retirement, and timeously
creating additional income streams that can see you through
retirement will obviously help tremendously.
The rule of 25
This is a simple theory that if you know what your annual living
expenses are, and you multiply this by 25, you will have the lump
sum figure that you should have invested before you retire. If
you’re married and share expenses then you should probably
do the calculation with your combined expenses. Even though
one partner may retire before the other, we don’t need to
overcomplicate things, as this is a ‘best guess’ calculation after
all. Also consider whether any of your current monthly expenses
would fall away when you retire.
As an example, if your monthly expenses come to R23,000,
you would simply multiply this amount by 12 to get your annual
expenses of R276,000. Multiply this by 25 and you’ll see that you
will need R6.9 million in order to retire and maintain the same
lifestyle that you currently do. This figure can obviously be
spread across investments but the house that you live in does not
count towards your retirement funding unless you’re planning
on selling or renting it out.
Generally speaking, you would not want to take any debt you
have into retirement with you. If this is your plan, then do this
calculation without any monthly debt payments you may have
now and you’ll need to be certain that your debt is settled before
crossing the threshold to a new phase of life.
How does this work?
The rule of 25 works together with another assumption, which is
that your investments will grow by 7% per annum, while you only
withdraw 4% per year for your expenses (adjusted for inflation).
You’ll see that 4% of R6.9 million is exactly R276,000, which
equates to your annual expenses for the year.
The flaws, however, are that one’s growth is never guaranteed
and that inflation rates change.
Doing the calculation with an inflation rate of 4% and an annual
growth of 7%, your money would easily last 35 years and more.
Increase the inflation rate, or decrease the growth, and your
money will run out sooner. The opposite is also true – that a
higher average growth rate along with a lower inflation will
cause your money to last much longer. Some followers of the
FIRE Movement (Financially Independent, Retire Early) have
adjusted the calculation to rather assume a required lump sum
of 30 times your annual expenses. This is a larger investment, but
it provides greater peace of mind.