when should i retire? is my retirement plan on track? by daniel r wessels january 2012 drw...
Post on 24-Dec-2015
213 Views
Preview:
TRANSCRIPT
When should I retire?
Is my retirement plan on track?
By Daniel R Wessels
January 2012
DRW Investment Research
Conventional retirement planning…Accumulating capital
Assuming constant real returnsA simplistic projection of accumulating retirement capital over time
-40
-38
-36
-34
-32
-30
-28
-26
-24
-22
-20
-18
-16
-14
-12
-10 -8
-6
-4
-2
-
Years prior to retirement
…”In the last ten years before retirement I will double my retirement wealth”…
DRW Investment Research
Conventional retirement planning…Drawing down during retirement
Relationship between replacement rate, initial withdrawal rate and retirement capital ratio
50% Replacement
70% Replacement
100% Replacement
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
8 9 10 11 12 13 14 15 16 17 18 19 20
Retirement capital ratio (factor of final salary)
Init
ial w
ith
dra
wa
l ra
te
DRW Investment Research
Assuming constant returns…But the reality is…
Rolling 10-year asset class real returns1900-2010
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Year
Perc
en
tag
e r
etu
rn
Equities
Bonds
Cash
Firer & Staunton, DRW Investment Research
“I’m 55 years old and planning to retire ten years from now
(age 65)”
• Will I have enough retirement capital?• Should I retire then or continue working, if
possible?
But, What do we know about retirement values ten years before retirement?
I’m afraid, not much…• The tale of two retirees…starting at the same level of retirement
wealth ten years prior to retirement, but ending very differently
Am I on track?The luck of the draw
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Years before retirement
Wea
lth a
ccu
mu
latio
n
(mu
ltip
le o
f fin
al s
alar
y)
1998 Retiree
2008 Retiree
If you think that is cruel, wait for this one…
• And another two retirees…same portfolios, same income, same contributions, but different decades and real returns!
Am I on track?The luck of the draw
-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Years before retirement
We
alt
h a
cc
um
ula
tio
n
(mu
ltip
le o
f fi
na
l sa
lary
)
1968 Retiree
1978 Retiree
If my retirement value ten years from now is not really
predictable…
• How can I then plan today for a successful retirement?
• When should I retire, given what I know today?
If not assuming future returns, what can we do?
• Backtesting my retirement plan and values today against historical return data and not assuming constant returns…
• Identify worst-case scenario for each assumption…
• No guarantees, but relative comfort that one is planning for bad return patches going forward…
My situation today (age 55)…Given what I accumulated in retirement wealth thus far plus certain
assumptions about income needs at retirement, longevity, etc…
Salary/income R500,000
Net contribution rate towards retirement fund
12% or R60,000 p.a.
Retirement wealth R4,000,000
Wealth multiple 8 times
Retirement age 65
Expected replacement rate at retirement
75% or R375,000 in today’s terms
Expected post-retirement period 25 years or until age 90
How did situations with these type of assumptions played out in the past?
What would have been the maximum retirement age or safe retirement age required to ensure the post-retirement
sustainability of my plan?
Safe Retirement Age influenced by…
• Post-retirement period (longevity) – for how long must my retirement plan be sustainable after retirement? -15 years, 20 years, 30 years, 35 years, etc.
• Savings rates – how much must I save for the rest of my working career?
• Investment portfolio – how much risky assets (equities) to include in my portfolio?
• Replacement rates – how much of my salary prior to retirement I want to replace with post-retirement income?
• Request full report and analysis from http://www.indexinvestor.co.za/index_files/RetirementAge.htm
• E-mail: enquiries@indexinvestor.co.za
• Fees may apply
top related