1. Look at your current monthly budget and roughly calculate your expected budget at retirement My monthly budget now & my expected budget on retirement
Sit down with your life partner and list all of your expenses carefully by going through your bank account statements, your credit card statements and your cash purchases and tally up the amounts, adjust the numbers for any known changes that would occur on your retirement such as a downsizing of your home, the sale of one of your two cars, and so on, then use this as a rough yardstick for your initial monthly budget during retirement no matter how far into the future that would be (assume that your expenses will grow exactly in line with inflation).
Decide whether you will earn further income during retirement or not. If you do expect to, then estimate the amount & deduct this figure from the amount pm determined in paragraph 1.
2. Look at the amount of capital that you have accumulated to date and calculate how much you will have saved by retirement age
Look at your pension fund and/or any retirement annuities or unit trusts you have to see how much you have saved so far. How much have you saved so far?
Then determine how much more your known contributions would add to your retirement fund’s bottom line at the beginning of your retirement and calculate the amount of capital that you will have built up by the time you retire.
3. Compare your capital with your income needs in retirement and ascertain whether your accumulated capital will be able to support your required income in retirement.
To do this, calculate the percentage yield that you’d need from your capital amount established in paragraph 2 per year in order to fund your budget as established in paragraph 1. Once you have the percentage yield, work out whether your capital will cope or be eroded before your retirement ends. Your financial adviser should be able to help you with this exercise.
4. Ask your professional investment advisor to compile a portfolio that will provide you with your desired yield.
Some questions to ask:
Which types of investments & in what proportions should they be used in my portfolio in order to ensure that it provides me with my required yield percentage from the interest income, rental income & dividends that it generates?
Is it even possible to compile such a portfolio or will I need to invest more between now & my retirement date in order to reach the targeted yield?
If I can’t save more than I’ve already determined possible in paragraph 2, how else do I ensure that my lifestyle in retirement is funded successfully?
Can my advisor propose a more aggressive portfolio to try to grow my capital faster without reducing the amount of income that it will yield?
Do I need to remain fully employed & also able to save for a few more years than I had planned? How many more years would I need to work for if I remained in my current employment? If my salary changed, how would I determine how long I’d need to remain employed?
In summary, you need to be aware whether you are on track for retirement or whether you need to make further provisions for your desired retirement lifestyle. This needs to be ascertained long before your retirement is due, otherwise you may find yourself without any hope of achieving that lifestyle you’ve desired for so many years.