Here’s the pickle you might find yourself in: You’ve figured out that if you were to retire today – with absolutely no debt at all – you’d need R10,000 a month.

Okay, maybe you need slightly more than R10,000 a month but you’ve still got the same problem.

• R10,000 a month sounds great for someone retiring today, but what if you’re retiring ten years from now?
• If you need R10,000 a month in your pocket, what will you need before tax to clear R10,000?
• What if you need that R10,000 a month to keep up with the cost of living for every year you’re in retirement? After all, R10,000 a month twenty years from now might just cover the cost of a loaf of bread.
• For how many years will you need the R10,000 a month? How long can you expect to live…20 years? And what if you have a spouse ten years younger than you?

Would you approach the problem like this?

You’ve decided you don’t need a Financial Advisor. You can do this all by yourself.

The first thing you do is grab an exam pad, open a spreadsheet and start doing a few sums. First off…

What will your monthly income need be at retirement?

• You’re fifty now, and you’re planning on retiring at sixty-five – that’s in fifteen years’ time. Step one is complete.
• You need R10,000 a month if you were retiring today, so all you need to do is increase that by 10% every year for the next fifteen years to get to the income you need.
• My goodness, R10,000 a month becomes R41,772 a month when you turn sixty-five.

What will your income need be after retirement?

• Once you’re over the shock you next need to figure out a further twenty years’ worth of income.
• By the time you turn eighty that R10,000 you need is now R174,494 a month.

How much cash will you need at retirement?

• Simple enough, right? Just take the monthly income need, multiply that by twelve months, and then total everything up.
• Shocker number two – you need R18,020,513 by the time you reach eighty. Heaven forbid if you live longer than that.

Right there and then you decide to throw in the pencil. There’s just no way you’re going to get to that sort of figure the way things are going right now.

Is there any good news?

Well yes, there is.

• The first bit of good news is that this is not how you do the calculation.
• The second bit of good news is that you’ve still got fifteen years to do something about it. You don’t want to get to retirement and then start doing the sums.
• The final bit of good news is that a Financial Advisor can do all the hard work for you.

What’s wrong with the “Do It Yourself” approach?

Two things:

• Your money is going to be invested somewhere. That means your capital is going to earn a return whether it be interest or capital gains. Which means your capital is growing while retired.
• You also won’t be needing the R18,020,513 at sixty-five. For instance, in year one of twenty you only need R501,270 to make it through the year.

Yes, you’ll need R18,020,513 looking back, but you might only need R8,000,000 at retirement to get to that amount at the end.

How much you’ll need depends on two things:

• What percentage return your investment earns over the twenty years of retirement, and
• What percentage of that investment you choose to withdraw as an income over those twenty years

The answer to these questions determines how much you’ll need at retirement.

This is how a financial advisor would approach the problem

Much the same as you would, your Financial Advisor would calculate your income need at retirement as well as after retirement.

Before retirement:

• How much would you need as income if you were retiring today? (Remember that income tax is factored into this, so aim a little higher)
• By what percentage would that income need to increase every year until retirement to keep up with the rising cost of living?

After retirement:

• What is the monthly income need at retirement?
• By what percentage must that income increase with every year to cover the increased costs of living, and
• For how many years must this income last while in retirement? (This depends on whether you have a dependant, and the age of that dependant)

The answer gives your Financial Advisor an amount to aim for.

They then perform a series of financial calculations with sophisticated software which calculates the lumpsum you’ll need to reach your objective. One of the factors in this calculation is your expected investment return.

Then your Financial Advisor looks at your pension and provident fund and any other investment which will be used for retirement.

Here is how it works:

• They project the current fund value of these investments to retirement based on an assumed investment return, let’s say 8% per annum. Take cash for instance. Cash is the most stable option, but it also comes with the lowest return. The lower the return expected, the more capital is needed at retirement.
• Then they take all your projected monthly contributions towards these investments and project those forward using that same percentage. Remember that your salary should also increase each year which means your monthly contributions to your pension fund will also increase.

Finally, your Financial Advisor takes the two amounts mentioned above, and deducts one from the other. The difference is your shortfall.

Your Financial Advisor then calculates how much you’d need to invest between now and retirement to make up the shortfall.

The monthly amount needed depends on three factors:

• How long till retirement?
• Will the monthly contribution increase every year with a certain percentage?
• What percentage return could we expect from this investment every year?

Conclusion

Hopefully, you can see how complicated this is.

The easy part is projecting your income need forward until retirement, and finally, until death. This can be hit and miss which is why you should review your situation every year.

The difficult part is working out how much capital you’ll need at retirement to last through retirement.

Remember:

• Your income need is growing larger with every passing year,
• You need that income to last a certain number of years, and
• Your investment is earning a return that offsets that growing income need

Then there’s the matter of projecting your current investments forward till retirement to calculate the shortfall.

Can you see that this isn’t something you leave till retirement?

Every year you should meet with your Financial Advisor and adjust your plan:

• Maybe your investment returns didn’t live up to expectations?
• Maybe you didn’t get the increase you were expecting which means you now have to save more?
• Maybe that R10,000 a month needed at retirement has become R15,000 a month?
• Maybe retirement has been pushed forward to sixty?

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