Pat Blamire deconstructs one of most pressing retirement questions – how much money do we need to retire?
I often get asked the question, “How much money do I need before I can retire?” And the question that follows is, “How much does a retired couple need as a monthly income in retirement?” But the truth is I really don’t know. Without going through the full financial planning exercise it is impossible to answer these questions.
In my position I see a lot of different people, each with their own specific circumstances. Some still have children or parents to support. Sometimes there is debt that still needs to be settled. In other cases there are properties that push up the client’s monthly income requirements. And then, of course, there is the question of lifestyle. Whilst some couples can survive on R20 000 a month, there are those who need an income of R50 000 plus.
As a starting point, before tackling the financial planning process, you need to be realistic about how much you are spending on a monthly basis. I don’t like the word “budget” and prefer instead to call it a spending plan. My recommendation is that you keep track of your spending for a few months to determine your cost of living. So many of us are living and spending unconsciously, and I have had more than a few clients who have been horrified to discover how much their lifestyles cost.
With this knowledge in hand, we can then factor in the cost of replacement vehicles, holidays, home maintenance, moving costs (if relocation is part of their plan), etc. As far as replacing vehicles is concerned, I find that in retirement, clients don’t do this as often as they did while they were working. Where they were buying a new car every four years before, the time period extends to six or seven years in retirement.
The next step is to look at their current investment strategy. Is their money sitting in a bank account and not keeping up with inflation, or is it invested across different asset classes targeting a specified return? Some clients are fortunate enough to have more than enough money to retire. However, this is not the case for everyone.
Only now, after some number crunching and fact-finding, can I begin to discuss what needs to be done in order to make the financial plan work. Some clients choose to carry on working for a few more years, and there are others who consult during retirement to supplement their income. We can also look at strategies, if it’s an issue, to reduce unnecessary monthly expenditure.
Once we are happy that we have a financial plan that works, it is important to review the plan on an annual basis at least. The original plan only takes into account possible expenditure, but we all know that life happens in the meantime. That is why we need to return to the drawing board to determine if the financial plan is still on track.
With careful planning and ongoing communication between the client and the financial planner, the necessary adjustments can be made to ensure the financial plan remains on track.