As discussed in Part one of this article, retirement planning is more important than ever.
A 65-year-old who lives the average lifespan will need to generate returns over a 20-plus-year time period. There are also clear distinctions between the types of asset classes you require in your retirement. In your working years, your strategy may be to accumulate wealth while, in retirement, you will be looking for income streams to support your endeavours.
But how do you develop your investment strategy? What are the key considerations for a succession plan? What level of investment capital do you need to retire?
Many of us don’t have any idea how of how many investment assets are needed to support a comfortable income stream. It may be more than you expect, based on the following assumptions:
- Retirement at age 65
- ‘Real’ return (i.e. after costs and inflation) of 5 percent
- Capital to last until age 100
The amount of capital required to support an income of $100,000 per annum is $1,715,909. Not an insubstantial amount.
Develop your strategy and savings plan
After determining your retirement objectives and outcomes, you need a plan to achieve them.
Use your cash flow in the best way possible. In Australia, we have a number of options to effectively utilise after-tax income, superannuation being the most notable. An important factor is giving your money the best opportunity to earn compounding returns. The following is a simple example:
- Investor one saves $50,000 per year in the 10 years before retirement;
- Investor two saves $100,000 per year in the five years before retirement.
Both contribute $500,000. However, based on a 5 percent return, Investor one will have a portfolio balance of $660,000 while Investor two will have a portfolio of $580,000. So, Investor one will have double the return.
It’s at this point you will need to develop your investment strategy. This not only includes the types of assets to invest in, but also the appropriate structures in which to invest. Superannuation is a tax-effective environment, although it does have its limitations.
Investments should be structured efficiently to assist in building wealth but also to help generate income during retirement. The mix of assets should be reflective of your tolerance to risk but, don’t forget, you are a long-term investor.
A strong succession plan achieves the transition of wealth and business interests to others. This involves both ownership and control. A succession, or exit, plan outlines the things you will do when you sell, close or transfer ownership of your business.
We tend to use the term succession planning for the transition of personal wealth to a spouse or the next generation. In both instances, the same principles apply:
- Identify key stakeholders
- Understand the financial requirements and other objectives of all parties
- Develop a shared vision between all stakeholders
- Identify and prioritise the most critical issues
- Clearly communicate your intentions with all involved
There is no cookie-cutter approach to retirement planning, and there are a significant number of issues to consider. A financial advisor will work with you to help identify your objectives, strategies, structures and investments.
Thinking about your retirement? Ask your William Buck advisor for guidance