Having sufficient savings for your retirement is an essential part of planning for the time of your life when you’re no longer working, but how do you ensure that your retirement savings will be sufficient?
I recently attended an excellent presentation by Coronation Fund Managers where this very issue was discussed. I’d like to share with you some of their findings, which identify several financial risks which retired people may face:
Courtesy of Coronation Fund Managers
Retirement Risks
- Inflation Risk: Retired people are at risk from inflation because most of their expenses relate to items which are inflation drivers. These include food, medical bills, and petrol.
- Sequence of Returns: Retired people should only draw income that is covered by the growth of their assets. For this reason, a balanced investment is needed which avoids high risk elements and also prevents low growth which erodes the value of retirement capital over the years. This ensures a good quality of life for retirees.
- Longevity Risk: People are living longer than they used to, with life expectancies well in the 80’s or older for many retirees. While longevity is a wonderful thing, it also means that retirement funds will have to last longer than in previous generations.
Knowing How Much To Draw
Traditionally, 7.5% was a good annual figure to draw on a retirement investment. However, because of low interest rates and inflation this amount may be too high for current conditions. The optimal amount to draw annually is 5%, meaning that an amount of up to 20 times your annual pension income must be invested by the time you retire.
If you find you are unable to retire by 60, all is not lost. By delaying your retirement by three years, the compound interest earned on your investment may easily provide enough growth so that you could retire three years later.