When should I retire?

Is my retirement plan on track?

By Daniel R Wessels

January 2012

DRW Investment Research

I’m 55 years old and serious about my retirement plan…

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

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

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

“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?

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

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

-

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

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?

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…

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

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?

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?

• Request full report and analysis from http://www.indexinvestor.co.za/index_files/RetirementAge.htm

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