Financial Planning is very simple, but the calculations are not. That is why so many people live in a fool’s paradise regarding retirement! They don’t understand the calculations; don’t know how to interpret the figures and accept that a “specialist has done it, so it must be fine.” The end result is mostly devastating.
So I am going to show you two easy ways to do the calculations. Obviously it is not 100% accurate, but it does give you a ballpark figure against which you can compare. And it is really easy, everybody can do it.
So how do I know how much money I will need to be able to retire?
Let’s get answers to the following questions:
- What is your current income per month? You would probably like more, but let’s say you would like to retire TODAY with the same income.
- How long are you going to live after retirement? Now that is a difficult one, is it not? As long as possible? As long as my money lasts? As long as the Mortality Table show? But we live longer – our life expectancy is increasing. Just for now, say 20 years.
Now we make an assumption that some people may say is conservative, but which I think is very optimistic. We are going to assume that the inflation rate and the investment return rate is the same. In other words inflation rate = investment return,
Now we are ready to calculate how much capital we need.
Multiply your required monthly income by 12 (to annualise) and then by the number of years you expect to live.
Example:
Income required = R10 000 per month
R10 000 X 12 = R120 000 per year
R120 000 X 20 (life expectancy) = R2 400 000.
Interpretation: subject to our assumption, if you want to retire TODAY with a monthly income of R10 000 per year increasing annually by the inflation rate, you need R2 400 000.
Tomorrow I will show you a way to estimate what the end figure will be.
For now, just calculate this figure and play around with different incomes and life expectancy figures.
Tags: Calculate, Capital, Retirement