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Two rules of thumb as you prepare for retirement

A simple calculation to determine your retirement needs.

In a previous article, I wrote about the importance of working with a certified financial planner as you plan for your retirement.

If you are sitting at home and concerned about your retirement, you can do a simple calculation to determine your retirement needs. This is by no means an accurate way of determining your needs, but it will give you a good rule of thumb of what you are aiming for at retirement.

The 4% rule

The 4% rule states that you can safely draw 4% from your investment without worrying about running out of money.

The figure of 4% comes from an in-depth analysis of retirement funds over a span of 70 years starting in 1925 and it seems to remain a good analysis even in the tumultuous financial markets of today.

To apply the 4% rule, you should take your estimated retirement fund and calculate 4% of that fund (simply multiply it by 0.04). Once you have this number, you know how much you can safely withdraw from your fund not to reach the point of ruin (as I discussed in a previous article).

You can take the 4% rule one step further by dividing the amount that you get after calculating 4% of your investment by 12. This will give you a monthly number that you can safely withdraw every month.

The 4% rule is a very tangible way to see if you have saved enough money to retire comfortably. By calculating a monthly amount, you can compare it with your current earnings, and your current and future ideal living standards when you retire.

The Rule of 300

The rule of 300 will give you a similar idea of your ideal retirement savings, but this is calculated from a different angle.

You start by looking at your current monthly expenses, not earnings. Take that number and multiply it by 300 to reach a figure. In this case, the figure will be the total amount you need to save to retire comfortably.

As an example, if your monthly expenses total up to R45 000, you will need R13 500 000 (R45 000 x 300) saved in a retirement fund to retire at your current living standards. This might seem like a very scary number, so you can tweak it by trying to imagine what your monthly expenses at retirement will be.

It is safe to consider that you will not have the same exact expenses at retirement as you currently have. Your children will have left the house (hopefully!), you may not have monthly car or house payments to make and you will probably save on your monthly travel budget unless of course you want to travel during retirement. Be prudent when you do your retirement budget, but don’t forget to add a bit of leisure and travel in, since you will finally have the time to enjoy it.

Lastly, it is important to remind you that this is a simple calculation. Market fluctuations, changes in retirement policy, political unrest and even better-than-expected growth from a solid financial investment plan is not factored in.

So, after you have made your sum and worked out your ‘number’, bring it with you to your meeting with a certified financial planner and let us help you reach that goal.

ADVISOR PROFILE

Martin de Kock

Ascor® Independent Wealth Managers

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COMMENTS   1

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When “people in the know” talk about the 4% drawdown rule, or any drawdown %, why do they never talk about tax? The 4% figure you arrive at is still not the amount you will get because the investment institution who attends to providing your drawdown money to you will attend to the tax deduction (SARS) first and you will receive your 4% drawdown once tax has been deducted. Give us lots of examples so we can relate and see how to work it out for ourselves. An example I found:
Your net need is 55000
Your gross drawdown must be 75800
Because tax is 20752
4.5% drawdown
Retirement pot: 20m
There were 2 other examples on how to structure your money better in order to pay less tax. Investonline did this in a wonderful online presentation which I came across because I am always trawling the net for information because I know very little and we are retiring in 3 years time. We (my husband and I) are not invested with them but I read their articles online.
There are not many of us who are lucky to have 20m saved in our retirement pot in the above example. Lucky, lucky folk.

TAX IS HUGELY IMPACTFUL ON YOUR MONTHLY ANNUITY INCOME DRAWDOWNS, ALONG WITH MEDICAL AID COSTS AND INFLATION.

I am learning. Today is “all things tax”. Boring but not really when the knowledge I gain will calm me down and give me hope that our retirement journey will be a good one. Folk who are a few years from retirement need to start paying more attention to the time when they will be on their lonesome without their work benefits. Just you and your retirement pot. The more I learn how little I know the scarier it gets. Be prepared. And make all things “retirement” your business.

Here’s to Eureka to us all.

End of comments.

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