Towards a Successful Retirement Plan. The implications of early retirement capital withdrawals and investment costs on achieving suitable replacement rates at retirement. By Daniel R WesselsOctober 2013. Key Concept
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Towards a Successful Retirement Plan
The implications of early retirement capital withdrawals and investment costs on achieving suitable replacement rates at retirement
By Daniel R WesselsOctober 2013
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%...
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 bothearly withdrawals and investment costs …
For example, comparing no withdrawals with fullwithdrawals 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…
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!
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.
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