*** Ask yourself these 5 questions…

*** To estimate your future needs, you need to know how much you're spending today...

*** Assessing your retirement readiness is easier than you think… and more...

From the pen of Karin Iten

Dear Investment Academy reader,

Can you believe we’re almost halfway through February? What's even worse is that I haven’t even touched on our February goal from our 12 month plan for getting your financial house in order. That’s why, the topic of today’s issue is: Recalculating your retirement needs

Remember, you should update your retirement outlook on an annual basis. If you don’t, you may find you don’t have enough to retire in the lifestyle you’ve become accustomed to. So do the sums and make sure you’re realistic about the amount of money you’ll save and make via your investment portfolio.

But how exactly do you do this? Well… that’s what we’re going at look at today.

5 questions to help you assess your retirement readiness

The first step towards getting your retirement on track is to assess your current situation. In order to do this, you’ll need to answer these five questions:

1) When do you want to retire?

The sooner you plan to retire, the sooner you stop working. And this means you’ll have less time to save, less time to grow your portfolio and you’ll be retired longer and will need greater capital.

If you plan to retire at 45, you’ll need a much more aggressive savings plan than if you plan to retire at the average age of 65.

2) What do you want your retirement to look like?

It doesn't matter where you intend to live, you need money to do so. You also need money for all those little “extras” you enjoy so much, like golf, holidays and Saturday afternoon braais. That’s why you need to sit down and work out just how much money you need to cover your current lifestyles expenses – and allow for inflation too. I’ll help you do this in just a moment, but before I do… ask yourself…

3) How long do you think your retirement will last?

Don’t make the mistake of using your own life expectancy as a target – almost half of the world lives longer than the average life expectancy. Even scarier, for every married couple over the age of 65, there’s a 36% chance that one of them will live to be 95 years old. So start digging into your family archives to find out how long members of your family have lived – this way you’ll be able to work out roughly how many years you’ll have left to survive on your savings. 

4) How much income will you need?

As a general rule of thumb, financial planners suggest you need about 80% of your pre-retirement income in savings to survive comfortably. You also need to consider your current pension plan. The massive stock market wipe out we saw last year, meant that retirement annuities lost more than 40% of their gains in just a matter of months.

This means that when you work out how much income you should have for your retirement, it’s best to err on the conservative side to ensure you have enough money tucked away.

Remember: If you’re not economising for your retirement savings now, you certainly will be after you retire – So reducing expenditure to pay of debt is very important.

5) How big is your retirement portfolio?

The more you save, the brighter the future will be. But you’ll need to ensure that the money you’ve tucked away is generating its own income so that the vicious jaws of inflation don’t rip it to shreds.

That’s why it’s a good idea to invest extra cash into an investment portfolio. If you’re far away from retirement, you can afford risk so look at growth shares and even derivatives, but don’t invest more than 4% of your total assets into any single risky investment. Equity unit trusts are a great way to get exposure and reduce risk.

The importance of counting every cent

Retiring well is ALL about planning correctly. To do so, you need to take the time to discover exactly how much money you spend every year on a “common spending category” – like electricity, groceries and utilities. Doing so will not only help you begin to plan realistically, but it’ll also allow you to streamline your current spending by highlighting your “bad areas”.

Create a table of general expense (including food, electricity, petrol, your bond/rent, phone bill, insurance, etc.) to get a realistic idea of how much things cost on an annual basis. If you’re not sure how much you spend on a particular item, take the time to carefully look through your records to make a fair and accurate assessment.

Remember to begin by allowing yourself generous space to move. Plan to live as comfortably as possible – and save accordingly. This way, if the total cost of living works out to be higher than you originally anticipated, you can trim your costs down without have to change your lifestyle.

So start today. Try to find a hobby you can develop for retirement. Any debt you take on must be for income producing assets, so walk past that sports car until you can buy it cash. And don’t take out any loans or withdrawals from your retirement unless you have no other option!

Karin Iten
For the Investment Academy