There are a number of factors to take into consideration. First, what would your preferred income be, and are there likely to be any major cash purchases immediately prior to or during retirement (such as a new car every few years)? What sort of lifestyle do you aspire to, and will this change as you get older? Last, and probably the most overlooked element of retirement planning, is your life expectancy? We are all living longer, and so need to plan for retirement funding to cover this longer lifespan.
In addition to these basics of retirement planning, there are also external factors over which you have no control, so you must also plan for the possibility of the proverbial spanner throwing itself in the works of your dream retirement overseas. Ask anyone from the Eurozone who receives their pension income in euros: they have seen the euro weaken against the baht for the past 12 months, which obviously means fewer baht each month for all of them.
Another factor that has proved unpredictable is the rate of inflation around the world. While interest rates the world over continue to provide meagre returns on cash and bonds, the cost of living has risen by significantly more so than official retail or consumer price indices. Although historically, the cost of living has been forecast rising by 4 per cent per annum, we have recently witnessed prices rising much faster than this historical average. This can make a big difference to a fit and healthy retiree.
Running a calculation today based on a fixed retirement income doesn’t necessarily guarantee you can enjoy the same lifestyle in the future. If you expect to live another 20 or 30 years, you must factor in the continually rising cost of living and how this will affect your future purchasing power. This is certainly an issue for British nationals with state pensions, who do not qualify for an increase in their yearly pension if they live outside the EEA (The European Economic Area).
Many people also overlook the fact that amazing breakthroughs in medical care in recent years will lengthen their average life expectancy. Unfortunately, you can’t simply plan for the average, or “mean” representation of life expectancy in the western world. Just because that average is 84, it doesn’t mean that you couldn’t easily live until 94, or even longer.
And if you are relying solely on an equity-based portfolio to draw a retirement income, you must be prepared for the down years and how this can affect your retirement nest egg. For example, the S&P 500 very rarely performs anywhere between +1pc and +10pc in a given year. Most years those returns are either 10pc+ or negative. So preparing for the odd down year is essential. If you draw 10pc per annum from a retirement portfolio and that portfolio falls 30pc that year, you will require a whopping 60pc gain the following year just to get your portfolio back to the previous year’s value. And that’s before drawing the next year’s 10pc income.
The best way to make sure you have sufficient income throughout your retirement is to plan for each timeframe – 10 years at a time. To do this, calculate what it costs you each year to live your ideal lifestyle, including any expected cash purchases, then compound this by 6pc per annum, which will tell you what you will roughly need in 10 years to maintain the same lifestyle. You may even consider adding an additional 10-20pc cushion to cover any currency fluctuations. Once you know you have covered all your living expenses for the next 10 years, you should aim to get your remaining cash working as hard as it can be for you.
If you’d like to chat to us at Phuket Expat Finance about how we can help you grow or protect your wealth, please drop us a line at: chatwithus@phuketexpatfinance.com