We all concerned about the future us who will be 65 years old. Do you think that you can afford to retire when time has come? If you think you can’t afford. Then you are doomed. The next question will be. How much will you need to retire when you reach age 65? Some of us will have to continue working until they drop. Working until you die is not what we want. But if we don’t have means to survive after age 65. We might need to work to supplement our income.
Retirement Planning Scenario
Meet Mr Paul Walters. Paul is 35 years old, married, with 3 children and he currently has R150 000 annual financial needs. There are no liabilities and no current savings towards retirement. He never thought retirement annuity is vital for him until recently. He has asked his qualified Financial Planner to give him a rough estimation of how much he needs to contribute to his retirement. Hoping that this will be enough when he reaches 65 retirement age. The retirement age will be in 30 years from today. He is assuming that he might leave until he reaches the age of 95 years. That is also 30 years from the age of 65 years.
The rough estimation
The interest is assumed to be 9% before tax and inflation rate is 6.5%. The current financial need of R150 000, will be R992 154.92 after 30 years. This is adjusted with 6.5% of inflation as prices will be going up. That means needs might be the same but purchasing power of R150 000 will be dropping by 6.5 every year. To encounter that, we adjust it with 6.5% every year so he can afford the same things he affords today.
The capital needed at the age of 65 until the age of 95 which is the life expectancy of Paul after retirement is R 21 million. This money is the future value of contributions of R 11 577.23 that Paul needs to make on monthly basis until age 65. If he can’t afford to contribute this much. Then he might need to work on his spending. Otherwise, he might need to remain in labour force until he dies. That is not an option that he desires but it’s the worst possible scenario. You may also use tax-free savings to supplement your retirement capital needed.
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