How much income will I have in retirement?

Correspondent | Monday August 24, 2015 15:22

Hopefully, you’ve been sensible and saved some money from your salary each month over your working life to build up assets that will provide you with income. The question now is how much money should you take as Income each month?

 

Where have you invested?

You may have money invested in rental Property, saved in a Pension fund, built up in an Investment Portfolio, and some in a Money Market Fund or a Savings Account.

If you have been savings into a local Botswana pension, you’ll be forced at retirement to purchase an Annuity. This is an income for life, provided by a Pension Fund or Insurance provider. The rates aren’t very high, and you won’t have much choice. A fixed annuity will give you the same amount of Pula every month (say 6% of your final pension pay-out) while an escalating annuity will increase each year but start from a lower base (say 3% of your final pension pay-out increasing at 5% per year).

Obviously, the fixed annuity is going to get eroded by inflation. Remember, at 7% inflation the cost of living doubles every 10 years. That would mean that the value of your income halves in real terms every ten years.

Your other savings and investments portfolios should produce growth in terms of interest, capital appreciation, dividends or rentals. All of these can provide a source of income – but you want to make sure you don’t dip into capital by spending your accumulated funds too fast.

 

What Is A Safe

Withdrawal Rate?

A safe withdrawal rate is the amount of money that you can withdraw from your investments each year while ensuring the ability for future year’s withdrawals to keep pace with inflation. You also want a high likelihood that your money will last for the remainder of your life expectancy, even if your investments give below average returns.

 

Calculating your

Withdrawal Rate

If you spend P5,000 per month (that is P60,000 per year) for each P1,000,000 that you have saved and invested, you are taking an income rate of 6% per year.

Remember to take account of inflation. You need your income to keep pace with inflation – your income must increase as the cost of living increases - so your capital must grow at the same time that you take income from it.

If inflation is at 7% per year, and you’re also taking 6% income, then your investments will need to yield you 13% per annum to keep up.

Traditional calculations say that a withdrawal rate of 5% per year is the average, and if you want to be guaranteed that you never run out of money, spend only about 4% of your investments each year. Unfortunately, an annuity provider will be unlikely to give you that level of income with inflation protection.

 

Five Rules for

Retirement Income

However, following a set of 5 clear rules will give you the greatest probability for increasing your retirement income. What happens if you follow these rules? You may be able to have a withdrawal rate as high as 7% of your initial portfolio value - or P70,000 per year for every Million Pula of capital that you’ve saved and invested.

 

Rule #1: Use

Multiple Asset Classes

Don’t have all your money in one asset class such as Property, Fixed Interest or Equities. A spread of investments is necessary to provide both the growth and the liquidity that you need.

Rule #2 Have The Right Proportion of Equities: Fixed Income : Property

Equities are more volatile in the short term, but provide the best long term growth. Property can provide stable income, but requires capital input, can have ‘void periods’ (and is illiquid - you can’t sell the tiles off the roof to pay for a medical operation). Fixed Interest investments are unlikely to beat inflation, but also don’t fluctuate in value very much in the short term.

 

Rule #3: Buy low, sell high.

When one area of your investments has performed well, take some profits from this and use it to re-invest into the out-of-favour assets. For example, in a property bubble, (for example when rental returns drop below 4% p.a. of values) consider selling your rental property - especially if it is getting difficult to look after. Provided you invest the capital wisely, you can always come back to the property market when interest rates rise and valuations fall.

 

Rule #4: Take your income

from the most sensible assets.

When your property is rented to a good tenant, use this for the majority of your retirement income and allow your other assets to grow. However, if you have a period without tenants, take a view on the performance of your liquid assets such as equities, and replace the income by taking withdrawals from those that have performed best.

 

Rule #5: Be prepared to

take a Retirement Pay Cut

If your investments have a short term downturn, you make have to plan to spend less money temporarily. Making sure you live within your means ensures that you don’t spend your capital by cashing in investments at the wrong time. However, if your investments perform well, you may be in for a salary raise!

 

Author: James Fern – Wealth Manager and Director of S.C.I. Training (Pty) Ltd. © S.C.I. Training is a BQA accredited training institution specialising in Financial Education. We also offer Debt Collecting services for companies with bad debtors and Debt Counselling services for those in financial distress. For help and information contact S.C.I. on 3180111 or money@wellness.co.bw