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How much money do you need to retire ?
This week the Sunday BG takes a look at what those who are between the ages 50-59 and will be retiring within the next 10 years.The issue is not as simple as defining a sum of money that needs to be saved and sticking with it for a particular period of time. Here is the first part in a two part series on ascertaining what you will need to save during your working life in order to ensure that your retirement is as comfortable as your working life.
Between this year and 2024, one of the largest generational cohorts born in this country will be retiring. How comfortably they would be able to do so would depend not only on decisions they would have made throughout their lives, but also on several factors outside their control.
In the US, members of this generational cohort, better known as Baby Boomers are facing some challenges. According to the American Association of Retired Persons, many of them will be working longer. The average age of retirement is up to 67 years. People are foregoing retirement in order to make up for lost savings opportunities. They are also staying employed longer to increase their social security benefit payout.
Equity in their homes would have decreased when the US housing bubble went bust and half of all Americans have their net worth tied up in their homes. The 2008 financial crisis would also have seen a reduction in the worth of their investments in stocks even though this is steadily improving.
US employers are also cutting back on defined benefit pension plans or eliminating them completely. Under a defined benefit plan, the employer contributes as well as controls and monitors the investment of these contributions, taking much weight and expense off of the employee.
When they retire, the employee receives a pension payment for life from the company. However, with these plans increasingly becoming a thing of the past, Americans will be going home with less when they retire, but from all projections will be living longer.
The Employee Benefit Research Institute has said that 46 per cent of Americans have less than US$25,000 saved for retirement. This figure diverges sharply with estimates of what Americans would need to retire comfortably in today's environment.
Investment company, Fidelity says that someone hoping to retire should have saved at least eight times their annual salary in order to live comfortably. In a Times magazine article, benefit consultant Aon Hewitt said that one should have 11 times their annual pay after they have retired. In the same article, other experts estimated as high as 18 times a person's annual salary.
Fidelity also suggested that someone about to retire should have as much as 80-85 per cent of their final salary as replacement income. Time gave some guidelines as well on how much one should have saved to meet some of the above targets. The magazine suggests that by 35, one should have one's annual salary saved, by 45, 3 times one's average salary, by 55, 5 times your annual salary and by 67, 8 times.
Fidelity said the following assumptions would be necessary to coming up with your own numbers:
• The age one started saving
• The date one planned to retire
• Income saved annually
• Annual salary growth
• Salary replacement at retirement
• Life expectancy
• And the expected rate of return
The Sunday BG wondered what multiple of their current salary would people heading into retirment here in Trinidad and Tobago need to live a comfortable lifestyle. To arrive at those figures, we made some assumptions of our own
Our retirees are a married couple of senior teachers, named Samuel and Jennifer, who are both in their mid-fifties and who are set to retire in 2019, five years from now. Between now and the, it is likely they will receive an increase of ten per cent on their salaries, as a result of the negotiations between TTUTA and the Chief Personnel Officer.
Their joint income is about $30,000 a month. They are in good health and are likely to live to at least 85 years, or 25 years after retirement. Meanwhile, inflation is expected to average about five per cent a year.
The Sunday BG put the following to Lloyd Ince, President of the Caribbean Financial Planning Association.
Crunching the numbers
Ince, who has over 30 years experience as a financial planner, has some sobering news for the would-be retirees. He said what was saved or income from annuities and investments would not matter as much as the couple's ability to live within their means, both before and after retirement.
“Income is always never enough. It is the ability of the person to live within their income that really matters. We have a situation of two teachers earning a joint income of $30,000, each earning about $15,000 a month. If they are able to live within their means, then five years from now their joint income would be $33,000 because their income would have gone up by ten per cent. If they are living within their means and that's their income, they would immediately suffer a 33 per cent drop in income because their maximum pension is now $21,978.”
The news gets worse for our retirees, Ince said. “In such a case, if they were living a $33,000 a month lifestyle, they would now have an immediate shortfall of $11,022 in the home. If they are able through lifestyle adjustments to live within the level of the pension then things are okay for the time being. But then there is the five per cent inflation rate, and what will happen five years later (in 2024) is that their living expenses will then be $28,044.
“In other words, the household is now having a deficit of $6,056 a month and if we were to project that 25 years into the future then, they would have living expenses of $74,418 or in other words or a shortfall of income of $52,440.Those numbers are very frightening.” Looking at the situation another way, Ince said if you cannot live well within 100 per cent of your income now, it is unlikely that you will do well with only 66.6 per cent of income during your pension years.
No Longitudinal Studies
When asked if he could provide Sunday BG with models similar to those done by Fidelity Investments and Time Magazine, Ince said this would be difficult. “Those are textbook definitions. Many times they do not approach the reality. Number crunching and projections like that are good for mathematics but not for lifestyle management issues like retirement. That will require some level of research and surveys within the normative arrangement for our region. Assumptions that work in the States will not necessarily work here.”
It has been suggested by at least one actuarial professional that persons about to retire in T&T might require less money as they receive the NIS senior citizens grant, as well as other benefits such as free transport and C-DAP. But it’s hard to tell for sure, since according to Ince, the Caribbean does not seem to have the data over the length of time, to make such analysis possible.
“You have to be doing research over the years into the behaviour of Caribbean people, the investment opportunities and to crunch the numbers that the Americans would crunch. You would have to do longitudinal surveys. What happens over a period of time to such a person and tracking that for high income earners, middle middle class, low income.”
“The data gathering process for what you call longitudinal surveys need to be done. I don't think we have a history of capturing data and analyzing it over a long term.”
Some more advice to the retirees
In addition to living within their means, Ince tells those about to retire to seriously consider what he called hedged investments. “You should seek to have a pension plan that will allow you an option of a reduced pension and a tax free lump sum. The tax free lump sum, they should earmark to earn inflation-hedged investment to supplement their pension, which most likely is going to be flat.” He said real estate and equity are considered “investment hedged”, because if prices go up, real estate for example tends to match that.
“When prices go up, inflation works to your advantage. Inflation is only a disadvantage when you are purchasing.” He also advised that with retirement in view, people should invest in apartments units to rent in their 40s and 50s, using the price of their current house as a guide. “Once the rental income, is higher than the mortgage payment , you have secured increased income which will then impact positively on retirement.” The purchase of a house is not needed, if one has the ability to convert a current home to rental units, Ince said.
Special interest and hobbies could also be an additional revenue stream. Ince said acquainting oneself with new technologies is also good as retirement years close in. “A person approaching retirement should not allow their ability to interface with the technology be impaired. Somebody could increase their resourcefulness to their commercial benefit.”
But all this aside, is there a magic number by which those in their 30s, 40s and 50s should be thinking about and could we come by it, with assumptions relevant to our own situation?