Recently I met a client who told me he needs $5000/month for his retirement income. So I asked him, how did he derive this figure?
He mentioned, "oh I asked me retired colleagues how much they spend per month during retirement and the average was $5000. Hence I would like to cater $5000 for myself."
The client was very confident and I was pretty confident he overlooked certain details.
In this article, I share about this retirement case study and discuss key pitfalls we need to consider when working out our retirement figure.
Is it inflation-adjusted?
The first question I asked the client after he shared how he derived his retirement figure was how long ago was the time in which he asked his retired ex colleagues this retirement number?
He told me 10 years ago.
He is currently 50 which probably means he asked his ex-colleagues when he was 40 so that he could make preparations towards this goal. Here's the first issue, his ex-colleagues were sharing with him an absolute number for their retirement and it's a 10 year old information. The client has not even reached retirement and on top of which, inflation does not stop at the age which a person retires. Inflation continues which means the yearly income a person needs should be increasing.
Even if we take a higher average retirement income factoring in the total of the overall income needed, the number we need to calculate has to be inflation-adjusted which in this case, isn't.
Is this figure inclusive of holidays?
The next question I asked the client was whether this $5,000 covered his retired colleagues' holidays. He took a pause and then replied, "I think the $5,000 covered living expenses. Holidays is a separate budget."
This leads me to my second point. By crowdsourcing this information, a lot of times there are a lot of hidden assumptions. If the holiday budget is separate from the living expenses, this means that client needs to cater for a separate income stream or set aside a lump sum to drawdown from to fund his holidays. Without our conversation, he would have factored in $5,000 income without this additional budget. Which also means his retirement would be a watered down version of his retired ex-colleagues' retirement given the miscalculation of the retirement figure.
What can we learn from this?
The biggest implication of miscalculating our retirement figure is running out of money prematurely. While basing our retirement on income streams would unlikely result in running out of funds, the alternate end result would be a compromised quality of life.
It is very common for us to base our own considerations on crowdsourced information. Perhaps a simple guiding thought process should include: information currency, whether the people you crowdsource from share similar lifestyles, ask what are the hidden cost to factor in.
Retirement planning appears straight forward yet can have many permutations to consider. I have written about some of the other considerations in this article.
After reading this article, you may have some questions or may want to find out more about your retirement number through a conversation with me. You can reach me by dropping me a message.
Be sure to share the article if you feel this information is helpful. You will enable a lot more people to learn about retirement planning.
About Janice
I specialize in retirement planning.
Clients look for me primarily to outsource their retirement planning needs so that they can focus on other aspects of life that interests them. Many of whom are very good in earning their incomes in their respective professions and wish to ensure their monies continue to work harder while they focus on what they are good at. Refer to client testimonials here.
I've helped many clients who are referred to me reduce the costs they are paying for their insurance or help provide solutions when they deem they are stuck with huge commitments bought when they were younger but unsuitable for their present life stages. You can reach me at 94313076 or my social media accounts on Facebook and Instagram.
Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.
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