Will you have enough money in retirement?

Introduction

I facilitated a retirement workshop over the weekend and we tried to assess if members were on track to achieving their retirement goals. The main question we attempted to answer was whether the members would have enough money saved up by the time they retired. To answer this question, we used the following case study:

Case Study - Edna

Edna works with ABCD Co. Ltd and earns a gross salary of ugx 5m per month. She actively saves with the NSSF and currently has ugx 50m saved with NSSF. She also saves with the staff provident fund (employer contribution is 7%; staff contribution is 5%). Her current balance with the staff provident fund is ugx 8m. Both provident funds pay an average of 10% interest per year. She is 33 years old and is expected to retire at 55. Edna currently spends about ugx 3m per month. Assume that Edna remains in employment, and her salary grows at 3% per year.

1. How much money will she receive upon retirement?
2. Upon retirement, Edna chooses to invest her lumpsum pension in an annuity plan, which guarantees her 10% interest per annum for life. How much passive income will Edna generate per month?

Retirement Model

I built a simple Excel model to answer this question. The following inputs are required:

The outputs of the model are here:

You can find the Excel Model here: https://themoneyengineers.com/wp-content/uploads/2024/09/retirement-model-edna.xlsx

Interpretation of results

Edna currently has a total of ugx 58m from both NSSF and the company pension scheme. She contributes a total of ugx 1.35m per month (or 16.2m annually) to her retirement funds. She has about 22 years before she retires. Edna will retire with about ugx 1.9bn in 2046. Of this amount, ugx 1.5bn will be accumulated interest. Edna would be able to earn about ugx 15.9m per month in her retirement. Her projected expenses are about ugx 8.8m per month, which leaves a surplus of ugx 7m, implying a margin of safety of 45%. This simply means Edna is on track to achieve financial independence during retirement. She will have more than enough money to live a decent lifestyle. She can spend some of her surpluses traveling the world, supporting causes, or starting any passion projects.

Conclusion

Retirement planning should not be complicated. It starts with a clear vision of your retirement. You then reduce this number to a passive income target, which can then be translated into a target retirement fund amount. You then project your current retirement savings, income, and expenses using a simple model. Finally, you evaluate whether you are on track to achieve your retirement goals.