Date post: | 31-Mar-2015 |
Category: |
Documents |
Upload: | griffin-aves |
View: | 215 times |
Download: | 2 times |
Towards a Successful Retirement PlanTHE IMPLICATIONS OF EARLY RETIREMENT CAPITAL WITHDRAWALS AND INVESTMENT COSTS ON ACHIEVING SUITABLE REPLACEMENT RATES AT RETIREMENT
By Daniel R Wessels October 2013
Key Concept
To maintain one’s standard of living at retirement one should have sufficient retirement
capital available at retirement to substitute at least 75% of final year’s pre-retirement
income with post-retirement income, i.e. replacement rate of 75%...
Explanatory Notes
Savings rate = the net savings (after costs) as a percentage of pre-retirement gross income that is
allocated each year towards the retirement plan.
Contribution period = the number of years that allocations will be made towards the retirement
plan.
Replacement rate at retirement = Post-retirement income as percentage of one’s final year’s gross
income before retirement. Typically, it is recommended that a replacement rate of 75% should be
ideal to maintain one’s living standard at retirement.
Gross investment portfolio real return = Returns in excess of inflation rate before deduction of
fund management, product, administration and advice fees
Net investment portfolio real return = Returns in excess of inflation after deduction of fund
management, product, administration and advice fees
Explanatory Notes (continued)
Maximum sustainable replacement rate = based on a drawdown (withdrawal) rate of 6% of
retirement capital available at retirement, and considered as the maximum withdrawal rate without adversely
affecting the long-term sustainability of one’s retirement plan.
Drawdown rate = post-retirement withdrawals, which is the income paid to the retiree and
administrative costs associated with the post-retirement investment, as a percentage of retirement capital.
Early withdrawal = Withdrawing full amount of capital available during pre-retirement phase,
proceeds are not used to supplement retirement capital or retirement income at retirement
Investment costs or fees = fund management, product, administration and advice fees as a
percentage of investment per annum
Net real return of 4% p.a.Early withdrawals and impact on replacement rate at retirement
Gross real return of 6% p.a. ...The impact of costs on replacement rate at retirement
And when considering both early withdrawals and investment costs …
For example, comparing no withdrawals with full withdrawals at n years
from the inception of retirement plan and calculate replacement rate
attained at retirement for different contribution periods and investment
return assumptions…
Gross real return of 6% per annum…
The adverse effects of investment fees and early withdrawals on replacement rates
Gross real return = 6%, savings rate = 15%, contribution period = 40 years
No withdrawal
Withdrawal = 4 years
Withdrawal = 8 years
Withdrawal = 12 years
0%
25%
50%
75%
100%
125%
1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%
Investment fees
Re
pla
ce
me
nt
rate
We can’t always expect high investment returns, or hope it will save the (retirement) day…but we have some control over our savings rates and
contribution periods…and early withdrawal decisions, investment strategy/costs!
Targeted replacement rate = 75%Contribution period, savings rate and net real returns
required
SR = 10%SR = 12.5%SR = 15%SR = 17.5%SR = 20%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
30 35 40 45
Contribution period
Real
ret
urns
req
uire
d
Thinking about retirement planning & “reforms”…
•Costs… if one needs a net real return of 4% p.a. over a 40-year period to achieve a replacement rate of
75%, how much “investment cost in the system” can be afforded?
e.g. 3% cost = 7% real on a gross basis, but is that a reasonable expectation?
•Consider the cyclical nature of real returns over time and beware that we’ve experienced a period of
high real returns in recent times…
•Implications for investment strategy?
•But can’t focus on the cost aspect only without addressing issues regarding capital preservation, e.g.
(unnecessary) early withdrawals…
Disclaimer:
Please note that all the material, opinions and views herein do not constitute investment advice, but are published primarily for information purposes. The author accepts no responsibility for investors using the
information as investment advice. Please consult an authorised investment advisor.Unless otherwise stated, the author is the sole proprietor of this publication and its content. No quotations
from or references to this publication are allowed without prior approval.