Do the maths before you retire
This week we look at five major issues that impact planning for retirement self-sufficiency and present a simple calculator to track your retirement lifestyle.
There are a number of major areas where soon-to-be retirees underestimate or do not plan adequately for retirement, such as leaving the workplace prematurely or drawing down on savings and investment assets too soon, and too much, in the early years of retirement.
Planning can also prove to be inadequate if they underestimating expenses in retirement, or overspending (due to leisure-time euphoria), likewise with underestimating the loss of purchasing power every year due to Bermuda inflation, particularly healthcare costs.
Further pitfalls can be failing to continue to invest to attain an appropriate rate of return, or by changing investment asset allocations risking capital erosion, or miscalculating the family longevity.
Here is an illustrative hypothetical draft retirement calculator chart based on a couple with total gross annual income of $100,000 ($70,000 and $30,000). They have some savings, a total of $240,000 in a pension scheme, health insurance with Future Care, and their own home, which was inherited from parents. They are undecided about continuing to work and live very frugally.
Below is the legend for The First Calculator — see chart that only includes the first five years because the entire 25 years cannot fit on one page
By way of disclosure, please note that these calculators are based on assumptions and projections. Results may be more or less than expected. Be aware that the calculations are based on straight-line math principles.
The entire electronic version will be available on the Pondstraddler Life Consultancy website at www.pondstraddler.com late next week.
C. Starting capital, such as savings and investments, at the beginning of the calculator year
D. Estimated average of interest / rate of return for year
E. Calculate the interest each year on the capital line C
F. Accumulated savings remaining at end of year, before any shortfall
G. Add additional savings during year, if any.
H. Add (subtract) net general income from line Q (shortfall) or savings. Reading between the lines for this couple, it is easy to see that they will need to work part-time at least, in order to not deplete their savings as is apparent in the next line I.
I. Remaining capital at end of year — the immediate shortfall will erode their capital
J. Net general income formula
K. Bermuda national pension scheme annuity. Calculate two pensions for a total of $240,000 at 25 years — interest rate 2 per cent, inflation rate also 2 per cent, to arrive $12,292 annual distribution. Here is a useful link to an annuity payout calculator: https://tinyurl.com/3lj3ke2
L. Government old age contributory pension, combine total of $15,000 per year
M. Rental income — none at present
N. Other income — none, couple is considering keeping jobs after retirement
O. Subtotal net general income
P. Less estimated general living expenses
Q. General net income (shortfall) or savings opportunity
R. Net general living expenses using personal inflation rate
S. Health insurance, medical care — 3 per cent annual inflation rate
T. Line S times 1.03 inflation rate
U. General household and personal — 5 per cent annual inflation rate
V. Line U times 1.03 inflation rate
W. Rent — 3 per cent annual inflation rate
X. Mortgage, auto financing
Y. Other expense intermittent, i.e. college 2019-2022
Z. Total general living expenses, also insert on line N.
General Net Income Formula
The first step is to have a very good idea of your general living expenses, the ones that recur on a monthly basis, year in and year out. Review your budget, go back to the 14-week series written for Royal Gazette between August and November 2015. The starting point is the article “A Post-CupMatch Financial Review”. The link is
We then subtracted general living expenses from projected annual income from various sources, being sure not to calculate in your total savings.
Interest and dividends from a savings and portfolio are also calculated each year on the spreadsheet itself, so those should not be counted with annual income, otherwise you’ve got a double count. Based upon our first spread sheet example the couple has a deficit of $15,000. This expense money has to be made up from somewhere, so it was then withdrawn from savings starting in 2017 and each year thereafter, on an inflationary basis.
And as you may have noted, the annual expense deficit is more than the combined savings /portfolio is earning each year. Inevitably, the point of depletion arrives, sooner rather than later. Not a good picture, initially, and probably quite depressing for many, but wait.
Let’s add part-time work to the equation. Just to break even, the couple needs to continue to earn another $15,000 each year.
You see the significance of making these assumptions and running some numbers early on. Thus, you decide to secure some type of a part-time job before you retire from full-time employment.
Well, a first reader response might be that this calculator does not count in all my expenses, income and other planning.
Of course not. That is for you to decide. I’m just giving you a basic tool to start with, such as running different expense amounts, income and seeing each outcome. Further, the calculator does not discuss how investing your pension can affect the outcomes, or what you should be invested in.
Retirement pension and investing is coming in the next couple of months. This is a huge section itself.
Do not forget the effects of inflation on your personal purchasing power. Only you know how much everything you need has increased each year.
Consider mix and match with your calculations. Using additional scenarios, you can mix and match these results with predetermined time frames to continue to work until you find a solution that works for you.
Work even for a few more years into retirement means not having to touch your principal. The longer you can delay, the longer your savings will last.
So, what does this all mean? Some would say it is quite obvious, don’t spend more than you can earn.
It’s more than that though.
You can use this calculator for right now, every year until you do retire. Next I will feature the calculator for a working couple with 15 to 20 years to go until retirement.
There you have it. This is a simple sustainable withdrawal calculator, while nowhere as sophisticated as my practitioner analytical tools, will still help you get your thoughts and your planning in order now.
See Related Media box for a PDF of the Retirement calculator
Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: firstname.lastname@example.org
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