Retirement planning means different things to different people. We dig into some of the variables that affect your planing.
How long is a piece of string?
Quite often I get asked how much a person needs in order to retire. And the answer is … “it depends”. At the end of the day we all have different requirements, and need different amounts to retire on.
Financial planning is a process. You need to have goals, but there are so many unknown variables in the planning process, that you need to constantly revisit where you are in the process and adjust if necessary. Anyone who knows me, knows that I am not a believer in long term forecasts, or straight line forecasting. We can look at average rates of return over many years, but when we are planning, the path of returns is really important and can work for or against you but still come out at the same average! It is easy to look backwards, but the future needs to be looked at through a range of outcomes. As we reach different milestones, or have significant changes in our lives, we can update what has happened in the past, and re-assess what we think will emerge in the future.
Ben Bernanke (former Fed Chairman) said, “Life is amazingly unpredictable; any 20 year old who thinks he or she knows where they will be in 10 years, much less in 30, is simply lacking imagination.” Life changes over time – your business may be more, or less successful than you planned; you may have more children than you thought you would, your parents may live longer than their money and your children might stay at home longer than you thought they would. But other things change too – incomes, savings rates, inflation, stock market returns, and many other things that you have no control over.
Think about the first home you bought. Taking out a mortgage bond is so daunting. You have to dip into hard earned savings to pay a deposit, and there are so many expenses that are associated with the purchase. Suddenly there is a significant monthly payment that you are committed to for probably twenty years! It’s surprising that anyone ever buys a home when there is such stress associated with it. But as time goes on, hopefully the value of the property increases, your salary or income increases, with a bit of luck the mortgage rates stays the same or goes down and the burden of the monthly payment feels less stressful. After twenty years, you have one of the largest assets in your portfolio, probably along side your pension fund if you are employed.
Saving can feel the same – how is there ever any disposable income left at the end of each month to save? But once the debit order goes off, or the contribution is made, it becomes part of the monthly expenses, and you become used to not having that money. The pot of money builds up and offers such enormous benefits later on. Saving early gives a person more levers to pull through their lives.
We also have different spending patterns, and therefore savings patterns through our lives. We may earn less in our 20’s and therefore not be able to save as much in monetary terms, but be able to commit a bigger percentage to the endeavour. When we are in our 40’s and 50’s we may earn more, but have many more expenditure commitments. Peak expenditure is a thing – people feel that they are drowning in expenses because it seems that everyway they turn there is something else that needs to be paid for. This too shall end! It makes it slightly easier to stomach if there is a nest egg that you can turn to, or at least know that the pot of money will keep working even if you can’t contribute to it for that period.
Remember also the most important rule in investing is the power of compounding. If you save early, and then stop and leave what you have saved invested, it will give a better outcome than starting late, but not stopping. Take a look at the table below for an example.
Sarah
James
Start Saving
Age 25
Age 40
Stop Saving
Age 35
Age 65
Total Saved
R66,000
R156,000
End Balance
R720,000
R412,000
Assuming each saved R500 per month and earned 7% on their investments.
The truth is that the number will change over time – as you age and spend down your portfolio and as expected returns translate into historical returns. Financial planning requires you to move the goal posts on a fairly regular and consistent basis, both in terms of the numbers and expectations. It is next to impossible to anticipate how the future will actually turn out.
On a less financial note, don’t get too caught up on savings at the expense of living a bit. And don’t get too caught up on being in retirement that you don’t spend the money that you have saved. In the old days (when I started in this industry) there was a notion that you had to live off the income that your capital produced. Never touch the capital!! In a (relatively) low interest rate environment and an era where companies buy back shares rather than paying out dividends, it is okay to dip into your capital in retirement. There is no doubt that there is a fine line between depleting the capital that you need to generate growth and living off the capital, but too often, people are so obsessed with preserving their capital that they forgo the experiences that they might have from using some of their hard earned cash.
Ultimately, it’s all about being rational, applying common sense and living life to the full!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.
How long is a piece of string?
Quite often I get asked how much a person needs in order to retire. And the answer is … “it depends”. At the end of the day we all have different requirements, and need different amounts to retire on.
Financial planning is a process. You need to have goals, but there are so many unknown variables in the planning process, that you need to constantly revisit where you are in the process and adjust if necessary. Anyone who knows me, knows that I am not a believer in long term forecasts, or straight line forecasting. We can look at average rates of return over many years, but when we are planning, the path of returns is really important and can work for or against you but still come out at the same average! It is easy to look backwards, but the future needs to be looked at through a range of outcomes. As we reach different milestones, or have significant changes in our lives, we can update what has happened in the past, and re-assess what we think will emerge in the future.
Ben Bernanke (former Fed Chairman) said, “Life is amazingly unpredictable; any 20 year old who thinks he or she knows where they will be in 10 years, much less in 30, is simply lacking imagination.” Life changes over time – your business may be more, or less successful than you planned; you may have more children than you thought you would, your parents may live longer than their money and your children might stay at home longer than you thought they would. But other things change too – incomes, savings rates, inflation, stock market returns, and many other things that you have no control over.
Think about the first home you bought. Taking out a mortgage bond is so daunting. You have to dip into hard earned savings to pay a deposit, and there are so many expenses that are associated with the purchase. Suddenly there is a significant monthly payment that you are committed to for probably twenty years! It’s surprising that anyone ever buys a home when there is such stress associated with it. But as time goes on, hopefully the value of the property increases, your salary or income increases, with a bit of luck the mortgage rates stays the same or goes down and the burden of the monthly payment feels less stressful. After twenty years, you have one of the largest assets in your portfolio, probably along side your pension fund if you are employed.
Saving can feel the same – how is there ever any disposable income left at the end of each month to save? But once the debit order goes off, or the contribution is made, it becomes part of the monthly expenses, and you become used to not having that money. The pot of money builds up and offers such enormous benefits later on. Saving early gives a person more levers to pull through their lives.
We also have different spending patterns, and therefore savings patterns through our lives. We may earn less in our 20’s and therefore not be able to save as much in monetary terms, but be able to commit a bigger percentage to the endeavour. When we are in our 40’s and 50’s we may earn more, but have many more expenditure commitments. Peak expenditure is a thing – people feel that they are drowning in expenses because it seems that everyway they turn there is something else that needs to be paid for. This too shall end! It makes it slightly easier to stomach if there is a nest egg that you can turn to, or at least know that the pot of money will keep working even if you can’t contribute to it for that period.
Remember also the most important rule in investing is the power of compounding. If you save early, and then stop and leave what you have saved invested, it will give a better outcome than starting late, but not stopping. Take a look at the table below for an example.
The truth is that the number will change over time – as you age and spend down your portfolio and as expected returns translate into historical returns. Financial planning requires you to move the goal posts on a fairly regular and consistent basis, both in terms of the numbers and expectations. It is next to impossible to anticipate how the future will actually turn out.
On a less financial note, don’t get too caught up on savings at the expense of living a bit. And don’t get too caught up on being in retirement that you don’t spend the money that you have saved. In the old days (when I started in this industry) there was a notion that you had to live off the income that your capital produced. Never touch the capital!! In a (relatively) low interest rate environment and an era where companies buy back shares rather than paying out dividends, it is okay to dip into your capital in retirement. There is no doubt that there is a fine line between depleting the capital that you need to generate growth and living off the capital, but too often, people are so obsessed with preserving their capital that they forgo the experiences that they might have from using some of their hard earned cash.
Ultimately, it’s all about being rational, applying common sense and living life to the full!
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.