Many of us are enjoying life depending on the income and job we are engaged to do. Depending on the job, some are given better condition of service packages made up of house, car, security, garden-boy, drivers, cook, travel allowance and medical care – including foreign medical care when the need arises. Some are entitled to food goods from restaurants every day, paid for by their companies. Some jobs pay at least school fees of two or three of our children. The key question is: “Can this standard of living be met post-retirement from your retirement income?”
The first step in retirement is to come out with an amount you will need post-retirement to maintain your standard of living. When employees who are due for retirement are able to determine the amount required to meet monthly obligations post-retirement, then financial advisors can suggest investment strategies to ensure a steady stream of income. In this article, we will provide the parameters that one should have information on in order to arrive at the critical amount required to ensure a more peaceful retirement life.
To come up with how much income you will need post-retirement, you need to have information on two broad parameters:
- Life expectancy Impact on Post Retirement
- Expected monthly expenditure
Life Expectancy Impact on Post Retirement
One can’t really know for sure how long an individual is going to live, and the longer you plan for the safer you will be.
Increasing life expectancies does in fact create two financial burdens in life. First, it can mean that as people are living longer in retirement they will need more cashflows or income streams for a longer period of time. Second, it also can mean people become more likely to reach the age when they can’t collect benefits at all. Yes, as people live longer more stable income streams are needed pay bills in order to survive.
Those consequences are however only half of the story. What the argument fails to consider is that those who live longer work longer, and contribute more to savings and investment. So it is very possible that rising life expectancies can improve the financial imbalances in wealth-creation, as long as a person is of good health and can still work after age 60. It really depends on at what age most people are living longer to.
Calculating Expected Monthly Expenditure
The monthly expenditure of each person will of course vary depending on their economic and social background. As a rule of thumb, you can take 50% of terminal wage rate as the required figure and plan accordingly. You can also come up with an approximate figure based on certain parameters. There will be variations based on preferences, but the underlying calculation will stay the same.
The following constitutes expenditure post-retirement:
- Daily consumption
As one retires and knows that monthly salary will no longer be credited to a bank account, it becomes scary as to whether people can survive life-pressures and associated cost. The daily consumption expenditure will not normally include things like groceries, electricity, water, food, clothing, telephone bills etc.
As people approach the age of retirement, the subject of housing becomes a major issue. Some plan to use the lump-sum cash received from social security or company-specific retirement benefit to build their house. Though good, the danger in that decision is whether the person can meet his/her daily consumption expenses beyond building a house.
A more-scary situation is where those who have enjoyed housing allowances or occupied a company apartment for years will now be considering paying rent or putting up a house. Housing will continue to play a crucial role in post-retirement expenditure determination. If your client has a house of their own, they will only have to factor in maintenance cost, whereas if they plan to stay in a rented house they also have to factor in monthly rental expenditure.
This is likely to be the most expensive item on a person’s list of expenditures. With old age, medical costs can only be expected to rise; you should factor in two small kinds of expenditure:
- Those for small and regular ailments
- Hospitalisation expenditure
- Regular laboratory test expenditure
This, again, can be factored in two:
- Daily transport expenses
- Outstation travel, if any
This would vary from person to person. Hobbies could be anything from travel to clubs to movies to reading. Each recreation activity comes at a price, which should be factored into monthly expenditure.
In India, even today, the education and marriage of the girl-child are matters of expense for their parents. Depending on how old the child is, you have to factor in these expenses at the earlier stages of retirement.
On the other hand, most children do provide some support to their parents. Support might be in the form of a joint family system, wherein the retired person doesn’t have to worry about daily living and housing expenses at all. Or it might be in the form of financial support only, wherein the child, for example, takes care of the retired parents’ medical expenses. The arrangement between the parents and children will vary from family to family and should be factored in accordingly.
Issues to be Kept in Mind
- This expenditure is calculated for two people (i.e. husband and wife).
- While doing calculations for expenditure, you must factor in inflation. Rising prices will mean rising expenditures for maintaining the standard of living. It is ideal to calculate using the real rate of return.
- For hospitalisation expenses, we assume that the client has some medical allowance from their employer (as is the case for government employees and employees of public sector undertakings). If not, they will have buy medical insurance.
Balance is key when it comes to successful retirement planning. Keeping a clear understanding of your current financial resources and your goals for the future are key to maintaining your lifestyle in retirement.
Statements and opinions expressed in the articles or review herein are those of Aanstreet Africa. While every care has been taken in the compilation of this information and every attempt made to present up-to-date and accurate information, we cannot guarantee that inaccuracies will not occur. Aanstreet Africa will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within this article or review.