Do you consider retiring in the future? If you are someone looking forward to retirement, do you know how much you would require to sustain the current lifestyle that you are enjoying now? Let us do a little experiment.
If you are currently bring home about $100,000 in salary after tax, and you do require similar amount per year to sustain your family lifestyle, how can you determined the amount of asset you should have in order to continue the current lifestyle?
Here are some factors we have to look into in determining the optimal asset size you should have.
- Retirement age
- Are you planning to leave some assets to your children?
- Future major expenditure
- Risk profile
Let’s us look at one example and how we should look at our own personal finance.
John is a high level management executive. He bring home more than $200,000 in after tax salary every year. However, his family lifestyle also cost similar amount every year, including mortgage. John is 5 years away from retirement and has no time to invest at the moment. He has roughly $1 million in investable asset through multiple mutual funds and insurance policies owns. He also has a $1,000,000 mortgage on his house which is payable for the next 15 years after he retires. On the 16th year after he retire, his expenses would dropped by $50,000 without the mortgage payment. He has four children, all would be going on to university after he retire, where each kid’s education cost about $200,000 in today’s dollar term. He would have to pay for it during the 10th to 14th year after his retirement. The average inflation in his country is about 3%. The long term market return for his country is about 8% while the long term bond yield now is around 3%. John want to leave $500,000 for each of his kids when he die.
How much John does needs when he retires?
Working back on his yearly expenses after accounting for inflation (3%), we assume that he invest the rest of his money after his retirement and only achieved market return (8%) for the remaining period of his life. Bear in mind that John would as least need a minimum insurance coverage on both his wife and himself which they can withdraw when they get sick in the future.
Moreover, they should also buy a life insurance to cover their mortgage just in case they pass away unexpectedly before the mortgage is paid off.
|AGE||Regular Expenses||Special Expenses||Asset at the beginning of the year|
|51||$ 200,000.00||$ 3,395,542.40|
|52||$ 206,000.00||$ 3,490,806.96|
|53||$ 212,180.00||$ 3,588,355.39|
|54||$ 218,545.40||$ 3,688,206.29|
|55||$ 225,101.76||$ 3,790,374.48|
|56||$ 231,854.81||$ 3,894,870.50|
|57||$ 238,810.46||$ 4,001,700.08|
|58||$ 245,974.77||$ 4,110,863.54|
|59||$ 253,354.02||$ 4,222,355.16|
|60||$ 260,954.64||$ 4,336,162.46|
|61||$ 268,783.28||$ 4,452,265.43|
|62||$ 276,846.77||$ 4,570,635.67|
|63||$ 285,152.18||$ 4,691,235.47|
|64||$ 293,706.74||$ 4,814,016.82|
|65||$ 302,517.94||$ 302,517.94||$ 4,938,920.23|
|66||$ 311,593.48||$ 311,593.48||$ 4,763,355.67|
|67||$ 320,941.29||$ 320,941.29||$ 4,554,373.54|
|68||$ 330,569.53||$ 330,569.53||$ 4,308,523.44|
|69||$ 340,486.61||$ 340,486.61||$ 4,022,038.60|
|70||$ 350,701.21||$ 3,690,807.87|
|71||$ 311,222.25||$ 3,661,046.47|
|72||$ 320,558.91||$ 3,668,176.09|
|73||$ 330,175.68||$ 3,666,589.01|
|74||$ 340,080.95||$ 3,655,247.16|
|75||$ 350,283.38||$ 3,633,013.78|
|76||$ 360,791.88||$ 3,598,644.64|
|77||$ 371,615.64||$ 3,550,778.38|
|78||$ 382,764.11||$ 3,487,926.08|
|79||$ 394,247.03||$ 3,408,459.89|
|80||$ 406,074.44||$ 3,310,600.68|
|81||$ 418,256.68||$ 3,192,404.56|
|82||$ 430,804.38||$ 3,051,748.28|
|83||$ 443,728.51||$ 2,886,313.32|
|84||$ 457,040.36||$ 2,693,568.58|
|85||$ 470,751.57||$ 2,000,000.00||$ 2,470,751.57|
It shows that at the beginning of his retirement, John would require a minimum amount of roughly $3.4 million in investable asset. Note that with a market return of 8%, his asset should continue to grow if he is just spending his regular expenses.
This is just a simple exercise to calculate how much one need to cover his or her lifestyle after retirement would. However, it would be more prudent to provide a degree of buffer for emergency fund or extended life-span.
Thus the $3.4 million calculated from his exercise should be the MINIMUM that John need to sustain his retirement which will arrive in the next 5 years.
How much would you need?
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned above.