When should I retire?
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Transcript of When should I retire?
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When should I retire?
Is my retirement plan on track?
By Daniel R Wessels
January 2012
DRW Investment Research
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I’m 55 years old and serious about my retirement plan…
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Conventional retirement planning…Accumulating capital
Assuming constant real returnsA simplistic projection of accumulating retirement capital over time
-40
-38
-36
-34
-32
-30
-28
-26
-24
-22
-20
-18
-16
-14
-12
-10 -8
-6
-4
-2
-
Years prior to retirement
…”In the last ten years before retirement I will double my retirement wealth”…
DRW Investment Research
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Conventional retirement planning…Drawing down during retirement
Relationship between replacement rate, initial withdrawal rate and retirement capital ratio
50% Replacement
70% Replacement
100% Replacement
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
8 9 10 11 12 13 14 15 16 17 18 19 20
Retirement capital ratio (factor of final salary)
Init
ial w
ith
dra
wa
l ra
te
DRW Investment Research
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Assuming constant returns…But the reality is…
Rolling 10-year asset class real returns1900-2010
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
Year
Perc
en
tag
e r
etu
rn
Equities
Bonds
Cash
Firer & Staunton, DRW Investment Research
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“I’m 55 years old and planning to retire ten years from now
(age 65)”
• Will I have enough retirement capital?• Should I retire then or continue working, if
possible?
But, What do we know about retirement values ten years before retirement?
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I’m afraid, not much…• The tale of two retirees…starting at the same level of retirement
wealth ten years prior to retirement, but ending very differently
Am I on track?The luck of the draw
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Years before retirement
Wea
lth a
ccu
mu
latio
n
(mu
ltip
le o
f fin
al s
alar
y)
1998 Retiree
2008 Retiree
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If you think that is cruel, wait for this one…
• And another two retirees…same portfolios, same income, same contributions, but different decades and real returns!
Am I on track?The luck of the draw
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1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Years before retirement
We
alt
h a
cc
um
ula
tio
n
(mu
ltip
le o
f fi
na
l sa
lary
)
1968 Retiree
1978 Retiree
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If my retirement value ten years from now is not really
predictable…
• How can I then plan today for a successful retirement?
• When should I retire, given what I know today?
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If not assuming future returns, what can we do?
• Backtesting my retirement plan and values today against historical return data and not assuming constant returns…
• Identify worst-case scenario for each assumption…
• No guarantees, but relative comfort that one is planning for bad return patches going forward…
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My situation today (age 55)…Given what I accumulated in retirement wealth thus far plus certain
assumptions about income needs at retirement, longevity, etc…
Salary/income R500,000
Net contribution rate towards retirement fund
12% or R60,000 p.a.
Retirement wealth R4,000,000
Wealth multiple 8 times
Retirement age 65
Expected replacement rate at retirement
75% or R375,000 in today’s terms
Expected post-retirement period 25 years or until age 90
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How did situations with these type of assumptions played out in the past?
What would have been the maximum retirement age or safe retirement age required to ensure the post-retirement
sustainability of my plan?
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Safe Retirement Age influenced by…
• Post-retirement period (longevity) – for how long must my retirement plan be sustainable after retirement? -15 years, 20 years, 30 years, 35 years, etc.
• Savings rates – how much must I save for the rest of my working career?
• Investment portfolio – how much risky assets (equities) to include in my portfolio?
• Replacement rates – how much of my salary prior to retirement I want to replace with post-retirement income?
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