Over the last couple of days I gave you two tools to quickly and simply calculate BALL PARK figures.  I use it all the time.  Instead of going to my HP10B Financial Calculator or pulling out MS Excel, I use the rule of 72 and the Capital Calculation.  It very gives me an idea if I should listen or not.

Essentially what we have seen is that we need a lot of money to retire.  And the huge projected maturity values are not so huge.

But underlying the traditional Financial Planning Solution are a number of assumptions.  I am going to discuss some of those assumptions.  Before I get to that, I want to refer you to an excellent book:  Po:  Beyond Yes and No, by Edward de Bono.  I would love to discuss the book in more depth, but suffice for the moment that De Bono says before we say “Yes” or “No”, let’s first say “Po”, what assumptions must hold true for this to be true.  That is what I am going to do.

Po:  What is the basic assumptions underlying the Traditional Financial Planning Solution?

Answer:  You have enough available cash to save enough money for retirement.

The basic assumption is that very month you can invest a percentage of your income so that, when you retire, you have enough capital.  In the previous posts I have shown you a way to easily do the calculations.  Unfortunately I do not have an easy way to calculate the monthly saving you need to make to get to the end result.  So I am going to give you the answer.

But, first, the assumptions:

This is what I need:

So how much do I have to save monthly to achieve that?

The assumptions are the same, except that I assume our income increase by the inflation rate every year.  As you can see in the table below, the fact that I work with a Rough and simple ballpark figure does not make a huge difference. 

Understanding what you see.  Every year my income INCREASE by the inflation rate (I used 6%) and I invest almost 55% of my salary and get a return of 6% per annum.  After 40 years I have the capital to sustain myself at the equivalent of R10 000 per month for 240 months.  My income will increase annually by the inflation rate.  If the assumptions hold true, I will be able to do it for exactly 240 months.  

If I consistently saved 15% of my salary for 40 years, how much would I have?  R6 986 525. How much would that be today?  A whopping  R679 245 and it will give me the very grand income of R2830 per month.

Now back to the assumption:  Based on what we have seen above (that you have to save more than 50% of your gross income to be able to be retired for 20 years, do you think it is a valid assumption to say you can save enough to provide for retirement?

Hey, do you have children?  Do you have property?  In other words, are you a luckier retiree?