IS IT too late to undertake financial planning as retirement draws near? For those who have never considered investing before, it may seem strange to choose the later years to start doing so. However, financial planners have found that financial planning in the later years has tremendous value in facilitating life goals and must not be overlooked. Let us consider the story of Harold. At age 56, Harold dreams of retiring comfortably in ten years, he operates a small retail business with his wife and they live comfortably on a $6 million, annual income. With living expenses totalling J$2 million annually, how can Harold secure financial stability for a comfortable retirement and establish a $2 million Trust Fund for his 12-year-old granddaughter, Kerry-Ann (to be accessed at age 21)?
HAROLD'S RETIREMENT PLAN
A general rule of thumb is that an investor retains about 80 per cent of his current living expenses during retirement (assuming he no longer has mortgage payments, or loans, but has taken on additional expenses, e.g. medical, vacations, etc.). In Harold's case we assume that the additional 20 per cent will be used for vacations and a very comfortable retirement lifestyle.
We would recommend an initial investment of $4 million (reflecting the excess of his annual income over his current expenses ($6 million-$2 million = $4million). If his retirement expenses increase by a nine per cent inflation rate each year during retirement then the total projected cost of his retirement is $33.4 million. Assuming his investments earn eight per cent per annum and the mortality rate is an ambitious 90 years.
For Harold to achieve his retirement fund of $33.4 million, he must accumulate an investment value of at least $10.9 million in 10 years at the start of retirement. Starting with an initial investment of $3.5 million, earning an annual rate of return of eight per cent, he will need to invest $13,000 monthly. Though Harold will stop investing his monthly savings at retirement, the initial investment value of $10.9 million will continue to earn interest at an annual rate of eight per cent.
Depending on the multi-faceted factors that determine portfolio allocation (risk-taking comfort level, outstanding debts, unexpected expenses, other) recommendations will vary. For Harold, however, we suggest:
Cash to provide liquidity for short term needs ( JMMB Tax Shelter)
Fixed income Provides periodic income stream (JMMB Income Builder and US$ Global Bonds)
Stocks (depending on Harold's risk tolerance) provides higher returns in the long run (JMMB Select Index Fund)
Life Insurance JMMB SMART LIFE
Estate Planning
KERRY ANN'S TRUST FUND
Harold dreams of providing a $2 million Trust Fund for Kerry-Ann when she turns 21 years old. Keeping in mind that $2 million today will not have the same value as $2 million dollars in nine years, inflation must be added to this figure. By using a nine per cent inflation rate, $2 million today will be equivalent to $4.3 million in nine years.
There are two ways Harold could achieve this objective:
With an initial investment of $500,000, earning an annual return of eight per cent per annum and investing $16,000 per month Harold will achieve his target of $4.3m in nine years.
Another approach that is highly recommended to protect Kerry-Ann's Trust Fund should Harold die unexpectedly before she reaches 21. Harold could invest in JMMB's SMARTLIFE Insurance product which by paying approximately $4,400 per month will give Kerry-Ann access to $5 million.
Join us next week when we explore the experiences of clients who have prudently embraced financial planning.
| Goal | Initial | monthly savings | future value |
| investment |
| Retirement Plan | $3,500,000 | $13,000 | | $10,900,000 |
| Kerry Ann's |
| Trust Fund | $500,000 | $16,000 | | $ 4,300,000 |
| Life Insurance |
| - ($5m coverage) | | $4,400 |
| Total | $4,000,000 | $33,400 |
