We’ve talked before about how expats retire by accident and unfortunately most of the time this doesn’t work out well. Particularly when someone has become familiar the standard of living one associates with being an expat.
It can be easy to get judgemental or perceive this lack of planning as irresponsible. After all, retirement isn’t a surprise it’s going to happen at some point it is the longest holiday of our lives.
We’ve seen so many people who think that they’re going to work forever. Retirement isn’t on there radar and they refuse to see it as an option.
Though it isn’t a realistic ideology because at some point you’re going to be unable to work. Whether that’s through health and physical ability or your desirability to the employment market.
So unless you can secure an ongoing income that comes whether you work or not then it’s a ridiculous position to hold.
There are factors beyond your control. You can eat properly and exercise yet how would you prevent yourself from developing Parkinson’s disease or multiple sclerosis if you’re genetically predisposed.
There’s another issue here though, that may be causing you to put your retirement planning off…
We think that often it’s due to people just not knowing where to start with their planning process. As you may well know finding a place to start is often the most difficult part of any project.
We’ve had so many conversations with expats about how much they need to retire.
As a result of these conversations the most common response, about 80% of the time it’s “I don’t know what do you think?”.
The problem is you don’t have a baseline to start from, so how do you start.
Even if you did make a start and look at what you think you need in retirement and when you’ll need it, what you’ve got to do to get it seems like too big of a financial commitment.
There’s several reasons for this, firstly your expectations of what you need in retirement could be unrealistic. The number of people who think that they need their whole salary when they retire is massive. In reality what you actually need is much less though we’ll talk about this in more detail later on.
Then there’s the retirement age that you’re using, the earlier this is the more you’re going to have to put away. Move this out by 5 or 10 years and all of a sudden what you’ve got to put away to reach your targets becomes much more manageable.
Finally, the other reason why you may have to put big amounts away to meet retirement goals is because you’ve left it too late. Hopefully this isn’t you, though if it is then not doing anything is only going to make things worse.
If this isn’t you, then don’t let it be because you can’t get back time and the one thing that you need when you’re planning for your retirement is time.
Therefore, we want to help you and let you know where you should start.
Then you can go straight to our pension calculator and it will help you do the rest.
Before that if you want to know about how expats succeed in creating wealth and also the pitfalls that impact many people in your position, then “Click Below”.
If you contributed to a final salary scheme throughout your working life and it was a good one. Then you would expect to receive 2/3 of your final salary as an income at normal retirement age (e.g.65). This is the consensus figure a person needs to maintain their standard of living in retirement.
To achieve this you would need to start contributions early and maintain them up to retirement. Most people don’t even come close to this figure. Which makes our point about people retiring by accident.
It’s possible to have a relatively comfortable retirement with 1/2 of your final salary, though you need to make concessions.
Head below this level and retirement will be dramatically different to the way that you live life today. You’re going to have to make some large concessions and you might be prepared to do this.
When you get to the stage where you’re going to be living on anything below 40% of your final salary then that’s some pretty big changes that you’re probably going to struggle with.
As we’ve mentioned earlier you don’t need 100% of our final salary when we retire. That’s because there are some big expenses that you won’t incur once you’ve stopped working.
For example one thing that you won’t be doing is making pension contributions anymore.
When you start to look at how much you’re going to need start thinking in terms of your current salary.
Look at the percentage that you’re aiming for which should be somewhere between 45-66%.
If you use our calculator then it’s going to inflate your current salary up to where it should be at your selected retirement age. So there’s no need for you to be thinking about final salary figures right now.
If you have high levels of commission or bonus then factor a proportion into your income figure, though base it on average years rather than the best.
We’ll keep saying this throughout this whole post because it’s important and that is this…
Make sure you review your retirement planning every 5 years.
Look at where you’re at and where you should be and if need be make adjustments to what you’re putting away.
Next, you’re going to decide on the age that you want to retire at.
You want a guide to work towards, an end destination for your planning process to focus on. As the saying goes “how do you get there if you don’t know where you are going”.
As we mentioned earlier the younger you want to retire the bigger the demands will be on your current finances. If you’re planning on retiring early then it’s going to have a bigger impact on your current standard of living.
This is because you’ll have to make a the larger contribution to meet your retirement goal. So, if you’re thinking of retiring before 50 then you may want to think about a flexible career, allowing you to work when and where you want.
Also, leaving it too late can mean you are stuck or you’re going to have to make do with a lower income. If you then decide to retire earlier, then this will only compound the situation .
It will mean that it’s even more difficult to achieve a decent level of income in retirement.
At the other end of the spectrum we’ve met many people who’ve planned their retirement at 70+ only to find that they hit 55-60 and they’ve had enough of working. Unfortunately, there’s not that much that they can do because they haven’t accumulated anywhere near enough to retire now.
As a guide, we would generally recommend that you choose something between 55-65. If you decide you want to keep working after this then keep working it is better this way around.
So now we move onto the inflation figure that you want to use.
Obviously, inflation rates fluctuate with periods of low and high price increases. Also government figures never truly seem to reflect what is actually happening to prices in that location.
So, much of what rate you use depends on where you’re going to be living when you retire.
If you’ve got somewhere in mind now then use the inflation figure for this location. When we talk about inflation figures we mean look at the long term average for that location.
If not then either base it on where you live now or your home country.
As we always view government inflation figures with a degree of scepticism. So, take the long term average for your chosen location and add between 1 to 2% to it. For example if you’re thinking of retiring in the UK and the rate has been 2%pa then use 3-4% to be safe.
Before we move onto the next section, if you want to know about how expats succeed in creating wealth and also the pitfalls that impact many people in your position, then “Click Below”.
Next, let’s look at the growth rate that you’re going to use in your calculation.
Let’s start by saying this depends on how much time you’ve got to go before you reach your anticipated retirement date.
If you’re in your early 20’s or 30’s and you’re looking at 30+ years before you retire. Then you can afford to be and really should be aggressive with your investment strategy. This is because you can wait for markets to recover should there is a big market correction.
Having said this, if this is you then you really shouldn’t be using much more than 10%pa as your growth figure. Whilst there’ll be years when you get much higher returns than this there’ll also be years when you get much less.
If you’ve got more than 10 years to you retiring then you can still take risk because you’ve got time. Though you should have an allocation that’s more conservative. This means if you’re in your 40’s-50’s a reasonable growth figure including dividend reinvestment would be around 8% per annum.
If you have less than 10 years to go before you retire then your investment allocation then you don’t have time to let markets recover. You should be holding assets that aren’t going to fluctuate so much. This would mean that you should look at growth rates of around 3-5% per annum.
You may think that these growth figures are on the low side and there are a couple of things you should understand.
Firstly, these figures consider any fees or acquisition charges for your pension portfolio.
Secondly, they take into account that as you get closer to retirement your investment strategy should get more conservative.
Finally, we come to the drawdown or annuity rate that you should look to use.
You need this so that you can figure out the capital requirement for the income that you’re generating for your retirement.
There’s a couple of options that you can use to produce income in your retirement and this is where the drawdown/annuity rate comes in.
Traditionally, when people reached retirement they used their pension fund to purchase an annuity. This is the payment of an ongoing agreed sum in return for an agreed upfront capital sum being paid.
Over the past 20 years, the popularity of annuities has been in decline for a number of reasons.
The rates that are offered vary with interest rates.
Retiring early will also push down the annuity rate that you’ll get and therefore reduce the income that you can expect to generate from your capital.
Another big issue affecting the popularity of annuities has been that traditionally once someone passes away the income stops and the capital is not passed on to the deceased family. Over recent years this has changed and there are many more options available in the market to provide a widows income though it comes at a cost.
The other main option that has become more popular in recent times is the drawdown. This is where the retiree keeps their pension fund intact and invest’s it to produce income.
This could involve different asset classes such as equities, fixed interest, property and cash.
The idea is to produce enough income from these assets so that the capital remains intact, though it is still available to supplement lean years or adjust for inflation.
In both of these instances, whichever method that you use given current interest rates a reasonable drawdown/annuity would be 5-6%.
Once you’ve done all of this and determined the information that you’re going to use in your calculation then head to our pension calculator.
You can then put all of this information into it, click calculate and it will do the rest for you.
Reading through this, one thing that we’re sure you’ll agree with is that things can change whether it be where you intend to retire, interest rates, income or our investment strategy.
It is, therefore, important that every five years or so, you review your circumstances and assess whether or not you’re on target to meet your retirement objectives.
Before we leave you if you want to know about how expats succeed in creating wealth and also the pitfalls that impact many people in your position, then “Click Below”.
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