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Tuesday, 15 April 2008

Can I afford to retire?

Well, yes and no ;) I ran some numbers through Excel to see what situation I'd be in if I retired today, compared to "early" retirement when I turn 56, "normal" retirement at age 65, or "late" retirement at age 71. I made some fairly simplistic assumptions as follows:

start with my current net worth,
an assumed ROI of 8% (after tax - a large chunk of NW is tax-sheltered in SMSF or family home)
an assumed inflation rate of 3%
constant current salary and savings rate (not adjusted for inflation, so probably conservative) retirement income of 75% of my current pre-tax income

If I quit paid employment tomorrow, my investments (excluding my family home and minus a lump sum to pay off the home mortgage) would yield a net income of around $25,000pa (using a "sustainable" 4% pension rate), or $50,000 (using a withdrawal rate of 8%, which invokes longevity risk and would leave no estate for my heirs). Probably a good thing that I'm not planning on quitting tomorrow, and that I have adequate Death, TPD and loss of income insurance in place ;)

If I choose to "retire" (stopped all paid employment) at the relatively young age of 56 I should be able to consume my retirement savings at the rate of 75% of my current pre-tax salary (adjusted for inflation) indefinitely, and may have an estate of around $6m (in today's dollars) to leave the kids (and grand kids) by age 95. I'm probably being overly optimistic with the life expectancy assumption - although I had two grandparents live until 94, the average of all four grandparents was 82, which happens to be mid-way between my current age and the world's longest verified lifespan. Then again, my parents are both quite healthy in their mid-70's, and medical science is pushing out life span's in the developed world by around 2 years per decade at the moment, so it's not completely unfeasible.

If I "retire" at the standard age of 65 I should be able to consume my retirement savings at the rate of 75% of my current pre-tax salary (adjusted for inflation) indefinitely, and may have an estate of almost $10m (in today's dollars) to leave the kids (and grand kids) by age 95.

I was somewhat surprised to find that delaying retirement to 71 and consuming my retirement savings at the same rate of 75% of my current pre-tax salary (adjusted for inflation) indefinitely, would only increase the residual estate to around $11.5m (in today's dollars) by age 95. I think this is because my retirement at 65 would only require a pension rate slightly above 3% of my investible net worth, so delaying retirement beyond 65 wouldn't have a huge impact on my estate.

I haven't included any possible inheritances in my calculations, as I think my parents and other elderly relatives are quite entitled to spend all their money on themselves, and may wish to leave any bequests to charities rather than their relatives.



Copyright Enough Wealth 2008

2 comments:

Futuristics said...

NICE Blog :)

traineeinvestor said...

An interesting series of calculations. I ran (and tend to obsessively rerun from time to time) calculations on my numbers and a few issues made a big difference to the final results:

1. rate of inflation: what if its is higher at say 4%?

2. high cost one off events such as major medical costs, home upgrades, children's weddings etc?

3. the fact than an average return means that some years the return will be above average and some years less than average. If you get below average returns in the early years of retirement then the retirement plan can fail (even if returns increase in later years).

I intend to deal with #2 by setting aside some lump sums in addition to my day to day living expenses. For #3, I will just work for an extra year after my retirement date to create a cushion. The inflation issue is harder to deal with.