How financial planning now can help you later
Retirement, that golden conventional milestone which bench-marks the beginning of ones life. For some, the culmination of a rewarding career. For others, relief that they are done with the rat race and they can finally kick back and spend time doing what actually interests them. A great majority of us don’t give the moment much thought aside from a fleeting moment every now and then until it finally starts to draw closer but, the prudent know the value in planning and the power of time.
While true retirement planning is a process that looks at cashflow, investments, insurance and lifestyle factors that include your needs and desires, for the purposes of this model we will be zeroing in on the financial aspect and more specifically retirement fund investing. Ever wondered beyond one of those fleeting moments just how much you could expect to amass in a retirement fund on the day you clear out your office draw or hang up that hammer for the final time but, didn’t have a clue how to go about finding this out? This first part in a two part series will show you just what to factor into your calculations to arrive at your estimated retirement fund figure.
Retirement Fund (Annuity in Arrear) Calculator
How this calculator works
This takes the regular concept of annuities (periodic payments) and adds further parameters to the equation to end up with a more comprehensive estimation of a future amount. By entering factors as your age, annual income, existing fund balances and contributions this model will estimate your “Amount at Retirement”. This future value has also been presented as a value, as of today (present value).
Assume you are just starting out in your working career, you are 20 and interested in knowing through calculation what you could amass by the time you retire at 65. You have landed your first job working in retail with a current annual wage (before tax) of $40,000. You have managed to square away some $5,000 in a savings account by working a paper run the past 2 years. You have done some research and come to a reasonable estimate of 10% for a long term rate of return on an mutual fund investment portfolio, you have also found out that wage rates seem to grow to meet inflation at 3%. You have done some calculations and made an estimate that you could commit 10% of your gross annual income to the retirement fund without missing it. By entering these details you come to a final amount of $4,313,532 in your retirement account at the age of 65. Using some financial concepts and calculations you determine the figure to be the equivalent of $1,140,664 at today’s value and could sustain a reasonable level of living.
Costs of investment have been excluded for simplicity. These include but, are not limited to transaction costs, fund management costs and capital gains tax. Personal circumstances differ and because of this taxes have been excluded from the model. Taxes are an important factor and should be considered in any final evaluation.
- Enter your current age – represented by whole years
- Enter your current annual gross wage – this is your before tax annual figure
- Enter your age in your final working year – represented by whole years, this is when you would like to finish up work. The figure you enter is your age in your final working year eg. if you plan to retire on your 65th birthday then enter “64” and the model assumes you work through your 64th year.
- Enter the balance you currently have in a retirement fund – 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 the “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 what you believe to be a reasonable estimate of your annual wage growth rate – This is the long term average rate that you would expect your wage to increase by. The default is set to be in line with inflation eg. 3%. However, a safety of margin might be 1.5%
- Enter the percentage of your annual gross wage you will contribute to your retirement fund – The value is based on before taxes (eg. If you earn a gross annual figure of $50,000 and you plan to contribute $5,000 (10%) you would enter 10. In Australia this form of contribution is called Superannuation Guarantee (SG) and it is compulsory. At the time of writing it is set at 9.5%.
- 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: Retirement Fund (Annuity in Arrear)
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