How financial planning now can help you later
In this second and final part to the series I will show you what is required for the journey down the other side of the hill. In the first part, we worked out what you could expect at that magic pivot point called retirement but, for most the other side can be as ambiguous, if not more, than the lead up to retirement. Post-retirement is meant to be the fun-filled period, the twilight years where you have little to no responsibilities, freedom of time and an abundance of choice and the last thought you want to entertain is whether you will run out! There is no sense in planning for retirement if you don’t have clear expectations of what you will require up to your cessation. This calculator will investigate what you will require in terms of an annual pension payment to meet your living expenses well into the future and to put it grimly, your exit point.
Pension Required (Annuity in Advance) Calculator
How this calculator works
By entering factors such as your age, estimated required pension if you were to retire today and retirement age this model will estimate your “pension at retirement” and the “required savings” to provide for this pension. This models works in relation to the model from Retirement Fund (Annuity in Arrear)). By comparing the result of the “Amount at Retirement” from Part 1 to the “Required Savings at Retirement” of this model we can determine if your financial plan in relation to these two models is effective or defunct. If the “Amount at Retirement” from Part 1 exceeds the “Required Savings at Retirement” of this model then you have an effective result, if not then either you put more away pre-retirement or reduce expectations post-retirement.
Expanding on the scenario from Part 1 – assume you are currently 20 years of age and you expect to retire at 65, simply because your dad did. You have completed the previous model and determined the estimated amount to be expected in your retirement fund at the age of 65. Now, you are interested in knowing what pension you would have to draw from that retirement account to meet the annual living expenses at that point in time. You work it out that if you were to retire today you would need approximately $60,000 (before tax) annually to cover living expenses. This factored in the need to no longer support children or pay a mortgage so the overall expenses were heavily reduced. You would like to leave $100,000 in the fund for your children and you are quite health conscious so you expect to live to 85. Using the same estimated long term investment fund rate of return of 10% and an inflation rate of 3% you can calculate a required amount in your retirement fund of $2,172,100.
Personal circumstances differ and because of this taxes have been excluded from the model. Taxes are an important factor and should be considered in your final evaluation.
- Enter your current age – represented by whole years
- Enter your estimated pension today – this is your before tax annual figure that, if you were to retire today, would be required to meet living expenses. When deciding on this figure assume you are at retirement age and have the expenses reflect this eg. you wouldn’t expect to have a mortgage or have dependents (children) to pay for so living expenses would be lower than your current expectations.
- Enter your retirement age – represented by whole years, this is the age you plan to cease work. The model assumes you retire on your birthday.
- Enter the funds left to your family – for all those selfish people out there who plan to leave nothing to their kin (teasing – you earned it, you spend it!), if you have a zero balance then enter “0” (no blanks!)
- Enter what you believe to be your expected long term (average) return on your investment – This is the nominal (before inflation) interest rate. The default figure is 10% as this is an “average” expectation from fund investment over the long term. To err on the side of caution you could enter a more conservative figure of say 5-7%.
- Enter your estimated age of death – represented by whole years
- Enter the estimated inflation rate – Check with your federal government for details on long term inflation rates. The default is set at 3%, an average demonstrated in Australia since 2000.
Financial Planning: Pension Required (Annuity in Advance)
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This concludes the tour and a brief introduction to the processes involved in financial management and planning. Stay tuned for the step by step do-it-yourself financial planning addition – coming soon!
I trust by reading through the information and interacting with the calculators you will now have the curiosity to investigate the topics in more detail. You can learn more by visiting the Resources, Financial Jargon and my Blog sections. In addition, there are limitless resources at your finger tips through a simple Google search. If you have any specific requests or questions please send me a message – I’m always happy to help!
You have an exciting time ahead of you. This is the turning point in your OWN financial journey so stay positive, be creative and learn!
Please signup to the eFM subscriber list if you would like to download the eFM ebook. Coming soon, this ebook will provide you with the step by step process to do-it-yourself financial planning.