Monday, 4 August 2014

Retirement Planning - how much should I save?

Whats Your Number?

One of the key things i help clients with is retirement planning by working out what they need to do now so they can retire when they want, with the income they require. While this is often done individually depending upon a clients exact situation, needs and timings for their retirement planning, I have put together a tabular guide for you below to show you what you need to do NOW to get where you want to be in the future. 

All the figures are in dollars but the currency is irrelevant. Its the numbers that matter.

Retirement planning is never simple but there are two key questions you need to ask yourself first:

- At what age do i want the option to stop working? (or how long do i have left until retirement?)
- How much income do i need / want to retire? (Assume you retire tomorrow, how much income would you want / need?)

Simple Retirement Planning

You can then use the table below to work out how much you need to save, each month, to achieve your retirement planning goal:

- Assumes an inflation rate pre-retirement of 3% per annum. So $20,900 is 25 years time would buy the same as $10,000 would buy today.
- Pay days remaining gives you an idea of how many paychecks you have left before retirement.
- Retirement fund required is based upon a fixed income drawdown of the annual income each year. Assuming this income is kept constant and the remaining fund invested cautiously achieving returns of 3% per annum the inflation adjusted income will be produced for a period of 30 years. Or, more simply, if you have a fund of $232,000 (using the 5 year data) you can produce an income of $11,600 per year from that fund for a period of 30 years if the remaining fund is returning 3% per annum.
- No consideration has been made for taxation. This does not constitute individual advice. If advice is required on the retirement planning structures and tax advantages available speak with an adviser.
- The retirement planning figures below assumes there are no existing savings. Where existing savings need to be taken into account the calculation is more complicated. If you need help drop me a message and i can produce the numbers for you.

So - lets look at a couple of examples:

Client A wants to retire in 15 years with an annual income of $30,000 per year in today's terms. He has a reasonably high appetite for risk so 9% is not an unreasonable assumption of returns. Therefore client A needs to save:
$2,553 per month

Use the 15 year data: saving $851 per month at 9% growth will bring him $10,000 per year today so he needs to triple this figure.

Client B wants to retire in 25 years with an annual income of $40,000 per year in today's terms. She has a reasonably high appetite for risk so 9% is not an unreasonable assumption of returns. Therefore client B needs to save:
$1,584 per month

Use the 25 year data: saving $396 per month at 9% growth will bring her $10,000 per year today so she needs to quadruple this figure.

As you can see, retirement planning for a comfortable future requires a certain amount of thought and commitment now. The earlier you start to save, the easier it will be. 

As an example below i will also demonstrate a more complex calculation still utilising the table for your retirement planning:

Client C wants to retire with an income of $50,000 per annum in 20 years time. He has existing savings of $100,000 and expects to receive another $200,000 on the day of his retirement. The $100,000 is invested returning 9% per annum. The $200,000 will increase in line with inflation at 3% annually. How much does he need to save??

- To produce an income of $50,000 per annum in 20 years time Client C will require a total fund value of $1,810,000 on his retirement date. (Using 20 year data he needs $362,000 for each $10,000 of income produced therefore we need to multiply $362,000 x 5).
- His existing $100,000 will be worth $560,441 in 20 years (at 9% per annum growth)
- His $200,000 retirement bonus will be worth $361,222 in 20 years

Therefore his existing retirement savings will be worth $921,663
Required fund $1,810,000 minus existing savings of $921,663 leaves us with a shortfall of: $888,337

We need to divide this figure by the fund required to produce $10,000 on the table, therefore:

$888,337 / $362,000 (the fund required to generate $10,000 in 20 years) = 2.46
Monthly saving @ 9% x factor above will show us the monthly saving required to produce the shortfall in the clients planning and is equal to $567 x 2.46 = $1,394.82

Therefore including his existing retirement funds, Client C needs to save an additional $1,394.82 per month at returns of 9% per annum to reach his retirement savings goal. 

I hope this perhaps helps one or two of you to better understand what you require to achieve your goals. As always if there are any questions then let me know!

Have a great day. Andrew Lumley-Holmes.


  1. I have an account with Friends Provident International that i have opened to save toward my retirement.. they match 125% of the money we put in..
    The program is called Premier Plus and the wording is:
    ""if you invest $2k per month for 10 years, you will qualify for the current Premier Plus Special Offer – Your Initial Unit Bonus Allocation will be: 125%
    This means that for the first 18 months, for every $2k you invest, there will be a $2500 USD working to buy units in your chosen investments..""

    I have to leave it in for 18 months, but then I can take out anytime.. How safe is this money? What returns should i expect from this account? I know they have AAA rating and Life Assurance Regulations of the ISle of Mann (1991)..
    is this a good deal??

  2. Hi,

    There are a few points to cover in reply to your comment:
    - Rating: They no longer have a AAA rating but now have an A (Strong) rating with both Standard & Poors and Fitch while it is A2 (Strong) with Moodys. Overall a strong rating plus there is policyholder protection in the Isle of Man for up to 90% of the value of your investments with no cap. Therefore, your money is quite safe with them.
    - To clarify the 18 month period. You must maintain your contributions for a period of 18 months. Any payments made during that 18 month period (including the extra 25% bonus) will have a surrender penalty applied to them should you withdraw the money invested before the end of the policy maturity date (10 years from what you have written above). The closer to maturity you get the smaller that penalty becomes. Any money invested after the 18 month period can be withdrawn at any time without penalty.
    - Returns depend on which funds you invest into. If you choose your own funds you might want to read the posts regarding investment risk to get some ideas about a portfolio, speak to an adviser or you can contact me directly.
    - Is this a good deal? The account is right for certain circumstances but without knowing more about your personal situation, nationality, tax residency, etc I can't really say one way or another.