Over the years that I've been in the business I have heard a variety of reasons/excuses that people have come up with regarding their lack of a comprehensive retirement plan. Here are a few of them, see if they relate to you:
1. I'll continue to work during retirement.
2. My spending patterns won't change much.
3. My medical expenses will be covered.
4. My Social Security (if you are unlucky enough to be taxed for this) will cover me.
5. I'll retire back home in India and because of the Dh-to-INR conversion, I'll be flush with funds.
6. I've already started saving a little, so I should be OK.
Every time I talk to a client about retirement and they come up with an answer like one of the above, I can't help but think about the lack of information there is on retirement planning. Apologies if you are "too young" to worry about retirement (that, by the way, is Excuse Number 7: Retirement is so far away that I have plenty of time to think about it).
Here are some facts. The following are the common areas that people aged 65+ (in the US) commonly spend on.*
Housing: 40 per cent of income
Food and beverage: 15 per cent of income
Medical care: 15 per cent of income
Transportation: 16 per cent of income
Entertainment: 6 per cent of income
Compare this to what you spend right now on the same areas. They aren't that different, save a few areas.
You are going to end up living longer than you expected (see below). By the time Gen Y or the Millennials retire, life expectancy is likely to be way over 85 on average. If you begin your savings later in life and expect to retire at the age of 65, you need to understand that you have possibly worked for about 40 odd years and that you have saved maybe 10-15 per cent of your income. How could your savings last for another 20 years?
Face it, as life expectancies increase, we are going to outlive our money.
Nothing drives this point home better than case studies. Sandra is 25 and has invested $5,000 per year for ten years. So her total amount invested is $50,000. Robert is 35 and has put away $5,000 for 30 years. His total investment is $150,000. Now Joshua, 25, has invested $5,000 per year for 40 years. His kitty swells to $200,000. Assuming a growth rate of 8 per cent per annum this is their retirement pot at age 65:
Sandra: $850,000
Robert: $661,000
Joshua: $1,511,000
Clearly, Joshua is going to enjoy more holidays in his retirement than the other two.
Dollar-Cost Averaging is where it's all at; keep investing continuously into portfolios over an extended period of time. If you do not begin saving now, it is likely that you will work well into your retirement and this won't be by choice.
If you are 65 today the probability of you living to:
Age 80: 75% for women, 65% for men
Age 90: 37% for women, 24% for men
Age 100: 4% women, 2% for men
* BLS, Consumer Expenditure Survey, Dec 31, 2011
Rickson D'Souza is director of wealth management at Pinnacle Insurance Brokers, Dubai, Tel: 04-436-8888
