Posted: 09 Apr 2008 02:40 AM CDT
Flickr! photo by Angelrays.
Financial Planning is as much an art as a science
Financial planning involves a few steps. It needs to first establish what are your assets and liabilities. What are the lifestyle expenses you need to cater for and how much you intend to retire on giving your income and expenditure.
Panzer is NOT a financial planner, hence, his approach is just a quick bluffer’s guide to help you do your own common-sensical retirement nest egg planning in 10 minutes or less depending on whether you can decide quickly on a few key variables.
Follow my calculations at YOUR OWN RISKS!!!
Calculating your retirement nest egg amount
The concept is simple, but sometimes the experts make it complicated.
What is the principal amount for your nest egg (investment capital)
To retire, you need money! So the key question is HOW MUCH DO YOU NEED. Now why do you need money? You have to eat, you have to go out for your leisure, daily activities, medical, transport etc… Let’s say you can live on say, $2,000 a month living expenses excluding your home. So in order to generate $2,000 a month, you have to save up your retirement monies (CPF+cash savings/investments + insurance proceeds – guaranteed amount) to such a figure that xx% returns x figure = $2,000 per mth or $24,000 a year. How do you calculate that figure.. wait for a minute, let Panzer show you the returns thingie first!
What is the rate of return you can achieve?
Hey, what is this xx% returns? This is the returns your retirement nest egg or capital is supposed to generated to give you the income to live on (for eternity or RP90 whichever comes first!).
So assuming you can get 5% return (say from punting on SPC shares yielding $0.40 final dividend at $7.15 per share), in order to generate $24,000 a year, you need to save a FIGURE of $24,000/5% = $480,000. That is excluding your home. If you monetise your home, where will you stay?
Input rate of return + how much you need per month and viola!
It’s that simple. Of course, this computation excludes your home which I have assumed you paid off fully. Let’s say, rental costs you say $1,000 a month (for 1 room), so you need to live on $3,000 a mth, then at 5% returns, you need $720,000.
This is a quick and fast way to give you broad figures to play around.
I use this for my own financial planning, i.e. basically my retirement or semi-retirement is when I can reach my nest egg figure assuming my lifestyle is $x,xxx per month, realistic returns of 5% or so and my home is fully-paid for.
Using this simple model, you more or less can see that if you intend to retire earlier than 67, you basically need to live within your means or simplify your life. Save and invest, the higher the achievable returns, the smaller nest egg you need to save and set aside and the earlier you can semi-retire.
A sibling of mine remarked in today’s age, there is no such thing as retirement as once your purpose in life stops (i.e. working for a living), you will to exist ceases. Hence, plan plan plan for your semi-retirement to be financially free so that you can pursue your heart’s desires.
Be well and prosper.