If our stated goal is to be financially independent in retirement how is that to be measured. Is it a magical figure of $50,000 per annum, or is it higher, lower and for how many years does it need to last?
The answer for all of us will be different. For those with a touch of wander lust the retirement fund will need to be larger, for instance.
The key is to ensure that retirement goals have been set and a target is in place. Many have yet to get past this first step.
Before the target is set in concrete some consideration needs to be given to the current situation and age of the investor.
Bob and Tina are aged 42 and have two teenage children. They see themselves retiring at age 65 and they would like to think that their retirement funds will last 20 years at least.
They discuss their personal goals in retirement and after preparing a brief list of likely costs they agree that $50,000 per annum would be an ideal amount.
Tina is aware that their current savings are $75,000. She visits her local financial planner for assistance and is given the following information:
Current savings situation $75,000, requirement per annum in retirement $50,000 and years left to retirement 23.
The answer is that the monthly savings required is $840 using a return of 5% per annum after tax.
Tina is initially taken aback by the required savings level. She knows that they will need to budget carefully to ensure that their monthly savings are as close to the target as possible.
But they now have a tangible goal to aim at and have increased their chances of enjoying a comfortable retirement.
Tina also knows that the house mortgage will be paid off in five years and the children will have left home thus increasing the opportunities to save.
This is a positive approach to achieving financial independence in retirement.
It is far better than the advertisements and articles which suggest that it is necessary to save 40, 50 or 60% of your income depending on your current age and also assuming that your retirement income needs will be exactly the same as they are now. That’s unlikely (but it’s still an idea to give this area some thought).
Obviously, the earlier savings are started the better - but never assume that it’s too late to start. And once started show discipline in continuing.
Do the sums first, set a target, save regularly and get assistance to invest wisely and the results may surprise you.
