“When I was young I thought money was the most important thing in life; now that I am old I know it is.” Oscar Wilde

In the last issue of Money&Wealth, we discussed in this column briefly about the effects of inflation on retirement savings and shed some light on what retirement can be like when all the company's perks and entertainment expenses are gone. However, with a bit of planning and investment discipline, there isn't any reason why anyone of us cannot continue to enjoy the lifestyles that we have become accustomed to and may be even to “live it up” in the golden years. After all, for those of us that have worked hard all of our lives, retirement is the time to enjoy the “fruits of our labour”. In the vol. 2 and final part of this column, I will elaborate more on how much you really need to retire on , how long your retirement savings will last and how to get to that elusive target of comfortable retirement.

How much will I need to retire on?

Deciding when to retire is the first step in planning for retirement. Many different factors such as personal, legal and financial will influence that decision. But a much harder question is determining how much is enough to retire on. One of three most important factors to that answer lies in our longevity . The average life expectancy for men is currently 72 and women is 75. But due to advanced medical technology, it would not be unreasonable to add another 20 years to the above figures. The second most important factor is what the inflation rate is likely to be during the retirement years and the third factor being the desired lifestyle that you want to lead. If you are close to retirement it is much easier to estimate how much you will need. However, it is important to develop a rough estimate even if you are 20-30 years away from retirement. Generally, 70-75% of your income before retirement may be required. This general guide will obviously vary depending on personal values, health, housing and other activities or hobbies as a retiree. By using your current budget as a starting point, you can come up with a fairly good estimate of what your expenses are likely to be assuming that…

But bare in mind that you may incur additional health care costs in your old age and don't forget that a modest inflation rate of 3% per year can double your cost of living in 24 years time. Whether your discretionary lifestyle expenses go up or down during retirement is up to you. Notwithstanding that, it is crucial to forecast your expenses as accurately and realistically as possible and to review them periodically. If you need help, then the best person to talk to is your financial planner.

How long will my retirement savings last?

Now that you know what is involved in figuring out how much money you will need during retirement, the next step is to calculate what your income up to your retirement age is likely to be and how much you will have saved by then. To do this you will need to list the total sources of retirement income; to most people there are 3 main sources: employer's provident fund (if any), Retirement Mutual Funds (RMF) and personal investments.

With employer's provident fund, you may not be as flexible in determining how the money is being invested but changes are in the pipeline whereby investors' choices will be offered in the near future by most plans. More importantly, it is crucial that you take full advantage of the tax-exempted savings plan such as provident funds and RMFs. Annual tax deduction can be as much as Baht 300,000 or up to 15% of gross income. Plus if your employer is willing to match your contribution into these funds always go for the maximum limit. By using an example in

Table 1 below we can illustrate the progress of retirement savings goals and gap. If you do not have enough funds to meet your retirement goals, it means you have a retirement “savings gap”, which is the estimated total savings you will need at your expected retirement age minus projected value of your current retirement savings and additional income you will save each year until retirement.

The major consequence of any retirement shortfall is most likely to be a reduced lifestyle over your entire retirement. But do not despair, there are a number of different strategies that can be employed to help you deal with your shortfall:

Once retired, it does not mean that you should stop investing. As mentioned earlier, people are now living longer and to many, the golden years can last as long as 30 years! By using the example in Table 3

, you can work out quite accurately how many years your retirement savings will last depending on the amount of withdrawal and rate of return per year. The first tip is that you should limit your withdrawals to about 5% of your savings per year so that you don't empty your portfolio too quickly. Secondly, in order to reduce transaction costs, you should liquidate an entire year's ration in one go, usually once a year. Thirdly, make use of tax efficient vehicles such as mutual funds, even in your retirement.

How to achieve comfortable retirement target.

If you remember one word from this article, it's start early . Unfortunately with retirement planning there is no magic pill that cures all. No matter how well you plan, you still need time for your savings to grow over time and let the magic of compounding do the work. Thus, the longer your money is invested, the more compounding will work for you because you earn interest on both your principal and interest. The concept of compounding, was once described by Albert Einstien, as the most powerful force in the universe! The effect of long-term compounding can reduce the amount you need to save to reach your retirement goal and the risk level you need to assume with your portfolio. This example is illustrated in Table 4 below. Somsri and Somchai are both 25 years of age. Somsri puts away Baht 1,000 every month for 10 years then she stops and allow her savings to grow at a compound rate of 8% pa. Somchai, on the other hand, did not start saving until 10 years later. When both Somchai and Somsri reach the age of 65, Somsri ends up with more money eventhough she actually saves less! The moral of the story? It pays to start early.

How and where to invest for retirement?

We now come to the last leg of the retirement journey but let me remind you again that the process of retirement planning actually starts the day you get your first pay cheque. To many of us, the old 2:1 rule applies; meaning that for every 2 years that we work we have to provide for 1 year of retirement. Most people work about 40 years in their active adult lives from the age of 25-65 and we probably spend about 20 years in retirement from the age of 65 to 85. Therefore, for every one year that we did not work or save for retirement, the task is going to be that much harder in the following year. Look at the example in

Table 5 By putting away only a modest sum of Baht 10,000 a month in the right investment vehicle earning about 10% a year you can end up with a 7-figure retirement nest eggs in 20 years time. This simply goes to show that investing for retirement does not have to be that difficult; it only requires a bit of planning and discipline to stay the course for the long run. As for the last and final question of where are we going to get 10% return year after year for 20 years, the answer is from the stock market. Although, it is a well-known fact that return from the stock market can be highly volatile and unpredictable in the short run but over a longer period of 10 to 20 years, past statistics have shown that 10-12% return per annum is achievable. Essentially, there are two simple rules in riding out the short-term volatility in the stock market: the first rule is to invest for the long term and invest often to take advantage of dollar cost averaging (Please see M&W issue 5) and the second rule is to adjust your asset allocation as you grow older or as your personal circumstances change. By the using the old rule-of-thumb of minus your age from 100 as an ideal exposure limit to equity in your portfolio is not a bad way to start.(See Table 6 below)

However, I would like to advice our readers that the examples shown above may not apply to your situation in full but you could relate them to your own set of facts and perhaps benefit from them.