SAVING FOR YOUR GOLDEN YEARS
As I noted last week, we need to take responsibility for planning, saving and investing for our own retirements.??This week we will revisit the advice I gave late last year on how you should be calculating the amounts needed for retirement. Retirement planning can be viewed as a tripod—a three legged stool.
One of the legs is our state provided retirement pension, i.e., the pension provided by the National Insurance Board (NIB).??The other is, either the defined benefit or defined contribution pension provided by your employer.??And the third is the income generated by your savings and assets I which you invested to produce passive income.
I noted that the minimum benefit payable by the NIB is TT$3,000 per month, which is obviously not enough to live on and must be supplemented by a company pension, income from savings and investments, or income from continued employment post retirement.
How Much You Will Need?
Calculating the amount you will need for retirement is not an exact science.??This is because that need is dependent on what you plan to do in retirement, the cost of living at retirement and your life expectancy.??The good and bad news is that we can all expect to live longer and healthier lives than our parents.??Since we are living longer than our parents we will need a substantial retirement nest egg.??I plugged my data into the Blueprint Income calculator, which you can find at?https://www.blueprintincome.com/tools/life-expectancy-calculator-how-long-will-i-live/, and I was told, based on my profile, that I could expect to live to 94.??You should enter your data to get an estimate of your life expectancy.
The amount you will need will vary based on your lifestyle and your expectations for your retirement.?However, a good place to start is your current living expenses.??In the second article of this series, entitled, “It’s Not How Much You Make”, I provided a template for calculating your monthly and annual recurring expenses and payments.??Here is an abbreviated version:
The numbers used are for illustrative purposes only.??If you would like a copy of the Excel file please send an email requesting it to?[email protected]?.
Another important factor is your retirement age.??Do you plan to retire???If so, will you retire at 60 or 65?
If you plan to retire at 60 or earlier you will have less time to build up your retirement assets.??In addition to living longer and possibly retiring earlier, if you are expecting more out of your retirement and plan to maintain a reasonably high standard of living, including international travel and entertainment, expect additional stress saving and investing for your retirement.
A good general guide is that your goal should be a retirement income in the range of 70% to 80% of your current normal living expenses.??However, if you plan to travel and entertain or to upgrade your standard of living the percentage needed may be higher.??If you plan to to spend more in retirement than before retirement, your retirement income may have to be more than your pre-retirement income.??Other questions to consider include:
One of the biggest factors influencing the amount needed is the rate of inflation.??I know, this is not a good thing, given the increases in inflation that we are currently experiencing.??Unfortunately, a one percent change in the rate assumed, say from 1% to 2%, could change the amount you will need at retirement by thousands of dollars.??Another very important consideration is the expected rate of return on your investment assets.??A reasonably conservative investment portfolio should provide a return of about 5.0% before taxes; or an after-tax return of 3.75%, given Trinidad and Tobago’s 25% income tax rate.
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You can reduce your stress levels about retirement by saving more and investing smarter.??And you should start now because the longer you wait, the worse off you will be.??You can also increase the probability of meeting your goals in three ways:
I know that crises like the global pandemic, the war in Ukraine and the effects of a warming climate, increase uncertainty and impact short-term investment valuations.??These blips in the radar test your resolve.??However, I hope that you have not panicked and sold.??My advice to you would be don’t waste this crisis!??Talk to your investment advisor and look for opportunities to invest.
How Much More Do You Need?
Using the spreadsheet, a snapshot of which is shown below, you can calculate how much additional income you will need for your retirement after taking into consideration all your existing sources of retirement income.
You should note that the results could be very frightening.??If you retire this year and want to live on your retirement income and not dip into your investment assets, you may need a nest egg as big as 30 times the annual income needed.??In the example shown, I used 26 times assuming that you can earn on average 3.75% after-tax on your retirement assets.??Again, if you would like a copy of this Excel file please send an email requesting it to me at?[email protected]?.
As I advised before, we need to take responsibility for planning, saving and investing for our own retirements.??Start now by using the template to write down your monthly and annual expenses and payments.??Then enter your sources of retirement income including any individual deferred annuities.??The difference, most probably a shortfall, is the amount of income that needs to be generated from your retirement assets.??Multiply the result by 26, based on the assumption noted above, to get the target for the value of your retirement assets.
The final step is to make a list of your existing assets that can be used to generate retirement income.?These include cash in banks and credit unions, investments in stocks, bonds and government treasury bills, rental properties, and any lump sums expected on retirement from your pension plans and deferred annuities.??If you own the house in which you live, you should include the equity (current value minus any mortgage owed) only if you plan to sell it on retirement.
Have a disciplined week as you work to build your financial freedom.??If you find this advice helpful, please share with your friends and colleagues.??As usual, I look forward to your questions and comments.??Be safe.??Take good care, and if you can, help someone in need.
Cheers, Nigel
Nigel Romano, Partner, Moore Trinidad & Tobago, Chartered Accountants