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There are two main drivers which determine if early retirement is even an option for you, says Kerry King, advisory partner at Citadel.
Firstly, how much capital you have, and secondly, how much you need to draw to sustain your standard of living.
Basic calculations
One of the basic calculations she gives her clients is to take their current monthly expenditure, divide this number by four and multiply it by R1 000. This calculation works when you are still trying to accumulate your capital and need to set a retirement savings target.
"If you are already at retirement age, however, ensuring that your capital will last your entire lifetime, which is generally unknown, becomes more important," says King.
To be conservative, she suggests that you draw no more than 4% of your retirement capital on an annual basis.
She uses the example of someone who retires at 55 years of age with capital of R10m. Assuming that inflation rises by 6% per year and that your investment achieves annual growth of 8.5%, then, by keeping their withdrawal rate to 4%, their retirement capital would sustain them until the age of 95 years.
However, by increasing their withdrawal rate to 4.5%, their capital would be depleted by the age of 87 years. A 6% withdrawal rate would mean that their capital would run out at the age of 77 years – nearly twenty years earlier than had they stuck to 4%.
At the same time, she points out that, if a 4% withdrawal rate will not provide you with sufficient income, it may be worth seriously considering delaying your retirement.
"Your salary and, therefore, retirement contributions are usually at their peak in the years just before your retirement. When combined with the added effect of delaying dipping into your capital, these last few years can make a huge difference to your portfolio through the power of compounding," says King.
She gives the example of an investor who has accumulated a R10m capital lump sum at the age of 55 years old.
If he retires at 55 years old and chooses to adopt a 5% annual withdrawal rate, then, again assuming 6% inflation every year and their investment achieving growth of 8.5% every year, the capital would be depleted at the age of 83 years.
If at 55 years old, the person decides to keep working part time until the age of 60 in order to to earn sufficient income to cover monthly costs until then, and if he does not add or withdraw any amounts from his retirement pot during those five years' time and his capital continues to achieve real growth of 2.5% after inflation, then, even without making any additional contributions, his retirement savings would then comfortably last until the age of 94. This is even assuming the same 5% withdrawal rate - but at a later date - as in the first scenario.
If he delays retirement until the age of 65 and continues to add R5 000 per month to his investments while still working, and that the capital also sees real growth of 2.5% a year, his capital base would grow to over R11.5m by the time he retires. This is a R1.5m increase in real terms from the R10m he would have retired with had he retired early at the age of 55 years.
"Given the increase in their retirement capital, the individual then chooses to draw down only 2.5% a year on their capital for their income, increasing this amount by 5% each year to keep up with inflation," says King.
"This means that his capital would last until he was 105 – in today's era, a more likely age for the individual to reach than the 83 years outlined in the first scenario."
King emphasises the importance of taking inflation into account when determining when you have enough to retire. Inflation is impacted by variables beyond your control, including the rand exchange rate. Therefore, having a "buffer" is key.
Another important point to consider is whether you have any outstanding debt that still need to be paid.
Legacy
A study by Just reveals that half of pre-retirees (at least aged 55), representing two thirds of the total respondents, have not yet calculated how much they will need in retirement.
Overall, many lack confidence that their money will last and reveal a high reliance on children and family to support them should it run out, says Just CEO Deane Moore. The results, therefore, raise the question of whether children should be more involved in their parents’ retirement planning, says Moore.
The 2019 Just Retirement Insights also reveals that, while leaving a financial legacy is important, it is not as important as receiving a guaranteed income for life.
Furthermore, independent international research revealed that most people aged 50-plus would prefer to enjoy their retirement years, rather than curb their spending to save money to gift to loved ones.
"Retirees are starting to realise that there are trade-offs in retirement and having an income that lasts and leaving a legacy are often opposing ideas. Instead of being conservative in order to leave money to heirs, retirees should be looking to reduce the risk of depending on the next generation later in life," says Moore.
"Regrettably, what many people still do not realise is that through a blended living annuity, which uniquely has a life annuity as an investment portfolio option, pensioners may be able to afford a secure, guaranteed income throughout retirement, which in turn should reduce the risk of having to turn to children for financial support in those final years."
