Many articles have been written about the subject of retirement planning and there are many books published by experts on this very important issue. I have just recently joined the fold of the retired group and I have been through the mill (so to speak) of planning and implementing my retirement plan in it's initial phase. It is this, the initial phase, which I would like to concentrate on in this article.
So, how do I plan my retirement date?
Most companies have contractual dates for retirement. For example, retirement ages could range from 55 years old for early retirement to 60 years old for Directors to 65 years old for operational staff. These dates are generally a guideline since companies do exercise some flexibility when applying these parameters. However, each individual should be using these parameters as a benchmark and then build a projected financial model to see if they are adequately provided for in retirement. Note: The use of a financial advisor is highly recommended in this planning process.
Since the above guidelines, your retirement date is in fact flexible provided that you can satisfy the golden formula which is expressed as: "Accrued income plus passive income must exceed your current cost of living plus an adjustment (up or down) for lifestyle choice in retirement plus inflation projections and sufficient liquid cash for emergencies ".
Let's face it, the thought of early retirement is in the minds of all of us but if you can not afford it, you are heading for suicide.
Let me expand the golden formula as follows:
- Accrued income is the monthly pension or income that you can derive from your pension accumulation through your working life. This figure will be provided to you by your pension fund or your investment institution.
- Passive income is income from investments that you made through your working life. Here you consider regular income from property investments, equity investments, dividends, savings interest, business partnerships and any other form of reliable income which you will derive on a monthly basis.
- Current cost of living is the full annual cost of your current lifestyle. Be extravagant in estimating this figure and be sure to include everything that you incur as a cost.
- Adjust your retirement requirements up or down depending on your circumstances and your intended lifestyle in retirement.
- Make adequate provision for injury during your retirement years. Your financial advisor should project your retirement capital adequacy over your expected lifespan.
- Ensure that you have a 'nestegg "of cash available for emergencies such as buying a new car, unexpected medical bills, renovating your house, helping your kids, taking some holidays and anything else which is relevant to your situation.
I spend many hours pondering the above elements and I suppose it is only natural to be very conservative about whether you can actually go ahead and retire. Assuming that the criteria for the golden formula are met and in order to make the decision a little easier, the following points …