For a couple of days now, I have been telling you how you can easily do your own financial calculations.  And when you start calculating, it becomes very scary.  Now let me share the scariest fact of all:

 

If you retire today, with the assumption that inflation = investment return, and that your income will increase by the inflation rate for 20 years, that is 240 months, what happens in month 241?

 

You will have no money left.  Let me repeat that:  you will have no money left.

 

Assumptions:

Required initial income is R10 000 per month for 20 years.  Income and capital grows by 6% per annum (inflation = investment growth rate).  That means that I need R10 000 X 12 X 20 = R2 400 000 in capital

 

Look at the table below.  After 20 years (in the Table Year 19) I run out of capital!  So what are you going to do in month 241?

 

	6.00%	2,400,000	6.00%
Year	Income	Capital	Growth
0	120,000	2,280,000	136,800
1	127,200	2,289,600	137,376
2	134,832	2,292,144	137,529
3	142,922	2,286,751	137,205
4	151,497	2,272,459	136,348
5	160,587	2,248,219	134,893
6	170,222	2,212,890	132,773
7	180,436	2,165,228	129,914
8	191,262	2,103,879	126,233
9	202,737	2,027,375	121,642
10	214,902	1,934,116	116,047
11	227,796	1,822,367	109,342
12	241,464	1,690,245	101,415
13	255,951	1,535,708	92,143
14	271,308	1,356,542	81,393
15	287,587	1,150,348	69,021
16	304,842	914,527	54,872
17	323,133	646,265	38,776
18	342,521	342,521	20,551
19	363,072	0	0

 

Understand the Table.  At the beginning of year 1 I take out R120 000 for my first 12 months income.  I invest the balance.  Beginning of year 2, I take out what I need and invest the balance.  And I carry on like that.  In year 19, I only have available exactly what I need for the year.  Do I hear somebody say:  “I will earn interest on the money for the year.”  I hope you do, but the effect is negligible.

 

How many people do you know or know of, who, a couple of years ago took a severance package, or who retired and are now working again, because they obviously have to?  In all probability, this is the reason.

 

Or as the Financial Mail article said:  “The luckier retirees live off alternatives such as rental income, or their children. Others don’t even have those resources.” Read it here.  So there is the answer and the solution!  You have a choice:  invest in property or have children!

Tags: Investing, Retirement

This entry was posted on Monday, September 29th, 2008 at 09:37 and is filed under Do your own Calculations, Financial Planning, What your Financial Planner Won't Tell You. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.