NOW i KNOW ! Cikaldana newsletter no. 03-2015 [on retirement planning]

NOW i KNOW !

Newsletter No. 03-2015

By the time it comes, you want to see retirement as a gift you give yourself.

How well have you prepared for it?

Let us vision ourself way ahead of our time. Let us imagine what we are at 10, 15, or even 20 years from now. What will likely happen to us during that time. Nobody knows! Nobody knows what the future holds, and yet to have imagination on what our future be, is worthy to think than to be in a blank.

This article tries to bring us thinking of our life forward into the future, to envisage one of a stage in our life many refer to it as a “retirement period�. We are to identify what we could possibly come to pass in that period, and to discuss what could be prepared today to embrace that future.

Saving for Retirement Have a clear idea of where you are and where you want to be in your retirement period.

Apart from whether we are now working in a company, running our own business, being a professsional, or working-at-home mom; we may face a period where our physicals need to pace down from working beat. A retirement period.

We can define retirement as a period of no longer working for a company at a certain retirement age defined by the company, let’s say at the age of 55, 60 or even 65 years old. Let us use this working age limit as reference for our next discussion in this article.

What will our retirement be look like?

There are at least four possible conditions on how a person would live their retirement period.  First, working still. This person sees work as an unseparated part of his/her life. This person will always work during his/her retirement period.

This type of person enjoy working so much that they do not even consider retiring.  Second, person who enjoy their retirement period by doing a considerably less demanding activities like gardening, farming, etc. Though simple it may sound, living this kind of retirement wouldn’t be that easy. We have to continuously have activities that are challenging to the physicals, intellectual and creativity.  Third, half work half retired or part-time retired.

There are people that want to enjoy the retirement and also want to keep working and be satisfied with the works done. Both status give satisfaction and balance of life for people retiring under this category.

 Fourth, established retirement. People retiring under this category usually fulfill their retirement period with voluntary activities. This type of retirement require an established financial conditions, that these people can work voluntarily without expecting a pay or income.

These people get their self satisfactions by helping others out from their workings.

Now, what kind of retirement do we want to be? We could come up with infinite ideas of living our retirement.

In any kind of retirement that we are envisioning, it’s a good idea have it prepared, in particular prepared financially. Many of us can agree that we need to have enough savings for our retirement.

Why so? There are at least for reasons that a retirement saving is needed by everyone:

 Increasing needs in life, which will be followed by an increased in cost of living.  Longer life expectancy on modern human being as medical knowledge and technological advances, resulting a longer retirement period.  Higher risk to illness as people gets older.  Want to be independent in older age, not dependent to children or families.

If we can agree with those reasons, planning a savings for our retirement would be one way of preparing ourself to live our retirement. The kind of retirement that we want to live determines the amount of saving needs to be prepared.

2

Retirement Planning Concept

Welcoming the Retirement Era

One of the aspects in retirement planning is the establishment of the retirement savings or retirement fund. Retirement Fund is a fund that we establish with purpose to fulfil our needs during our retirement period.

The first period, Welcoming the Retirement Era, is a period between now and our retirement age. In this period, we have two ages that we need to take close attention to, they are our ‘current age’ and our ‘retirement age’. During this period, we are considered as a productive person, in a sense that we are working and making income.

In planning our retirement, we can recognise the two periods in our life, which periods we will call them as:  The first period: Welcoming the Retirement Era  The second period: Living the Retirement Era

Welcoming the Retirement Era

Current Age

Living the Retirement Era

Retirement Age

Welcoming the Retirement Era is a period where we should have envisioned what kind of retirement we want to have. A period where a retirement fund should have been established. A period where ideally we would have been saving for living retirement.

The earlier that we welcome this retirement age, the more opportunity we get to have a retirement of our vision.

End of Retirement Age

Illustration: Two Periods in the Concept of Retirement Planning

2 3

Living the Retirement Era

ning the retirement fund are:

The second period, Living the Retirement Era, is a period between the retirement age and the end-ofretirement age. End-of-retirement age is the age when we plan to end our retirement living, or some others simply refer to as the age we are likely to rest in peace.

1. We need to have enough retirement fund at retirement age, enough to cover living-cost expenses during Living the Retirement Era;

The end of retirement age determines how long we are living the retirement era. The longer duration of living the retirement era, the more cost of living retirement we would need to prepare.

Now that we know the two horizons of time in our life above described, the two key objectives of plan-

2. We need to establish a retirement fund during the Welcoming Retirement Era, or while we are productive. Establishing a retirement fund can be achieved, one way, by saving and investing.

As we now understand the concept of retirement planning, we can now address on how we plan for achieving enough retirement fund.

Planning Our Retirement Fund There are two planning stages in the retirement fund planning. The first stage is planning for Living the Retirement Era; and the second stage is planning for Welcoming the Retirement Era. The key objective of the first stage planning is to determine how much amount of fund will be needed at retirement age, amount that is enough for us to living the retirement era. The key objective of the second stage planning is to determine how much money to save, so that we can achieve that amount of fund said at the retirement age.

Assuming a living cost inflation of 8.00% per year and applying the compounding formula, our current yearly living-cost expenses of Rp 100 million will likely increase to Rp 466 million when we reach the age of 60 years old.

This living-cost expenses will continue to increase reaching to almost one-and-a-half billion rupiah, Rp1,479 million per year, at our 75 years’ age. See diagram below for an illustration of our living-cost expenses’ projection.

1,479

Living-cost Expenses Per Year, Projection by Age (in million Rp) 1,006

685 466

First Stage, Planning for Living the Retirement Era

317 216 100

We start the first stage of planning by first answering several questions below. We are going to assume the answer too, to enable us to calculate the numbers later on.

1. What age are we now? (say, 40 years old).

2. What age are we going to start living in retirement - our retirement age? (say, 60 years old).

3. When, at what age, are we planning to end living our retirement? (say, 75 years old).

4. What is the level of our current living-cost expenses? (say, Rp 100 million a year).

40

147

45

50

55

60

65

70

75

Age (years old)

Knowing the ever increasing of living-cost expenses during our “Living the Retirement Era”, the next thing we need to find out is how much money we will need to have at our 60 years old, so that amount of money will be enough to pay our living-cost expenses until our age of 75?

Once we have the answers to those questions, we can calculate how much fund we need to have at our retirement age, sufficient to cover our living-cost expenses during our 60 to 75 years old.

43

Assuming that the sum money we have at 60 years old later is to be put into savings with an interest of 5.00% a year, we can calculate that the amount of fund we need to have at our 60 years old will be about Rp 8 billion. Yes, eight billion rupiah!

Assuming that we plan to saving or investing our money from zero, and into investment products with potential long-term return of 20.00% a year, we can calculate that it is possible to achieve that eight billion rupiah at our age of 60 years old by investing for a lumpsum amount of about Rp213,200,000 starting from now.

The plan’s idea is that, we would use-up that eight billion rupiah of retirement fund during the fifteen years’ period of our “Living the Retirement Era”, from age 60 to 75. Starting from age 60, we will regularly withdraw some pre-determined amount of money from our established retirement fund savings, to pay for our living-cost expenses.

If we prefer to invest regularly and in a smaller amount of money, alternatively we can do it also by investing annually in an amount of about Rp36,500,000 or by investing monthly in an amount of about Rp2,600,000.

As we spend the eight billion rupiahs, the remaining balance of our retirement saving will decline every year and it is planned to be completely used-up at the age of 75, which age is our planned ‘end-of retirement’ era. The diagram below illustrates the balance of our retirement fund over Living the Retirement Era.

Investing Target:

Rp 8,170,000,000 investing for 20 years period, with an assumed return of 20% per year

Option-1 Lumpsum Investing

Option-2 Investing Annually

Option-3 Investing Monthly

Rp 213,200,000

Rp 36,500,000

Rp 2,600,000

Projected Balance of Our Retirement Fund, by Age (in million Rp) 8,170 8,113 8,015 7,872 7,678

7,428

7,115

Now we know the numbers. We also know the options of investing amount that we can choose from, to suit our condition or convenience. The next step is finding out the suitable investment products and thus execute our investing activities according to the plan.

6,731 6,269 5,719 5,073 4,321 3,450 2,449 1,304 (0)

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

Age (years old)

Second Stage, Planning for Welcoming the Retirement Era By now, we know that we need about Rp 8 billion (or Rp 8,170,000,000 to be more exact). The second stage of planning is to determine on how we are to achieve that amount of fund.

Assuming that we start preparing the retirement fund from now - at our current age, assumed 40 years old, by calculation we have 20 years of time to prepare the retirement fund, until our age of 60.

Preparing to achieve the needed Rp 8 billion of retirement fund for a period of 20 years, one way is by doing the saving activities. Saving for a 20 years’ period is considered a long term saving.

The concept, planning steps and calculations elaborated in this article can be exercised using other age assumption, other investment return assumption, and other assumptions. Calculations made here are all done using basic compounding and TVM (time value of money) formulas which you can find them easily online.

Retirement is one of a moment in life, just like birth or marriage. The better we are prepared for it, the closer that it could happen according to our dream.

With a strong willingness and commitment in the planning and execution, any vision and dream on how we are to living our retirement, is not unachievable.

By Iswin Hudiarto The writer is Principal Financial Planner and Director of Cikaldana Financial Advisory.

When saving for long term, general recommendation is to saving into investment products which potentially can make considerable returns to our saving or investment.

PT Cikaldana Korpora  Sovereign Plaza 21st Floor, Jl. TB Simatupang Kav.36, Jakarta 12430 P: +62 21 2939 8727  F: +62 21 2939 8898  www.cikaldana.com  E-mail: contact@cikaldana.com

53