NOW i KNOW ! Cikaldana Newsletter no. 02-2016 [on Ideal Retirement Fund Amount, by Age by Income]

NOW i KNOW !

Newsletter No. 02-2016

The Idea of Retirement Fund.

How real is it?

To be in retirement is real for many. In fact, it is considered one of important phase in life that many people will likely face. Earlier generations, maybe our parents, some parents of our friends; might have gone through, or currently being in that particular phase of life.

Money is real. Let us bring down the idea of retirement to the ground and translate it to monetary values. This article tries to estimate the amount of retirement fund needed, for a range of ages and income levels.

I Need Money for My Retirement!

How Much??

Estimating how much fund we will need for our retirement.

The fundamental goal of planning a retirement money is to have enough money to living the retirement. What makes having sufficient money during retirement period is important in financial planning? Here are some of the rationale.

First, maintaining our lifestyle. Most of us generally want to live the retirement period with (at least) the same lifestyle level with the lifestyle we are living now. Lifestyle entails money, and to maintain certain lifestyle for sure needs certain sum of money to prepare.

Second, the growing cost of living. Inflation is real, and it has direct impact to our cost of living. Our current cost of living won’t likely cover our cost of living for the next 2, 5 or 10 years later. Our current money has lesser value in the future by the inflation.

Third, most retirees have limited or no source of income. In most cases, retirees are relying their cost of living from the saving they have accumulated, plus some money they got from the company they have worked before. Some retirees managed to have income but it’s limited by their physical conditions. Some others want to just enjoy the period and not working. Preparing to have enough saving in due time is therefore essential.

Other reasons can be of preparing a retirement health saving, preparing fund for travelling, being independent from children, preparing estate for heir, and so on. It could be anything imaginable.

THE RETIREMENT FUND TABLE To meet the retirement goal means to meet certain financial goal, which is the target amount of money, enough for paying our living cost during retirement.

How much money is enough? You, me, others have own numbers on the ‘how much’.

As distinctive as the possibility on the ‘how much’, there is a set of general guidelines that we can benchmark our self to get an idea on how much money we will need for our retirement. Using these guidelines, let us develop a table that will give us some ideas on what the target amount of money to achieve, needed for the retirement.

One of the guideline is a concept that, our lifestyle has strong correlation with the income we earn.

Typically the higher income the higher lifestyle cost.

Another guideline is an assumption that lifestyle cost during the retirement period will typically lower as compared to the lifestyle cost during active working period. The lower cost typically due to no longer servicing debt, no longer bearing the school cost of children and from the lesser needs of living.

Taking a moderate assumption on the lifestyle cost during retirement period, we will use 60% of current income. Other guideline is a set of financial assumptions that we need to take into account when calculating our plan on retirement money.

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For a more detail elaboration on the retirement fund planning concept and calculation, the previously published NOW i KNOW ! number 03-2015 newsletter has the topic covered.

current average monthly income of Rp 50 million, then by now we ideally should have a retirement fund in a value amount of Rp 2.564 billion (two point five six four billion rupiah). This value is an estimate amount of needed retirement fund, of which the fund could be comprised of our savings, our investments, social security (i.e. BPJS Ketenagakerjaan), properties, and other assets.

Applying the guidelines and general assumptions, we can calculate and then develop a table (as seen below) that can give us an estimate figure amount of retirement fund needed, according to one’s age and one’s lifestyle. One’s lifestyle here is represented by one’s monthly income.

For other example, that if our current age is 42, just average the numbers that fall under the column age 41 and 43. For other income level not stipulated in the table, just do the same averaging technic and estimate the number.

This is how to read or find our number in the table.

Example: if our age now is 43 years old and with

Monthly Income (in million Rupiah)

Age (years old)

10 20 30 40 50 60 70 80 90 100

35

37

39

41

43

45

47

49

51

53

55

221 442 662 883 1,104 1,325 1,545 1,766 1,987 2,208

273 545 818 1,090 1,363 1,635 1,908 2,181 2,453 2,726

337 673 1,010 1,346 1,683 2,019 2,356 2,692 3,029 3,365

415 831 1,246 1,662 2,077 2,493 2,908 3,324 3,739 4,154

513 1,026 1,539 2,052 2,564 3,077 3,590 4,103 4,616 5,129

633 1,266 1,900 2,533 3,166 3,799 4,432 5,066 5,699 6,332

782 1,563 2,345 3,127 3,909 4,690 5,472 6,254 7,036 7,817

1,123 2,247 3,370 4,494 5,617 6,741 7,864 8,987 10,111 11,234

1,515 3,031 4,546 6,061 7,576 9,092 10,607 12,122 13,638 15,153

1,885 3,770 5,656 7,541 9,426 11,311 13,196 15,081 16,967 18,852

1,816 3,632 5,448 7,264 9,080 10,896 12,712 14,528 16,344 18,160

ASSUMPTIONS: No existing retirement fund yet - Retirement age: 55 years old - Inflation of living cost: 8% p.a. - Net Deposit Return rate at 5% p.a. - End of retirement age at 75 years old - A moderate risk profile.

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LESSON LEARNT

Other lesson, if we have children, it is necessary to educate them to start saving/investing for their own retirement from their early age. The earlier they start saving/investing, the lesser fund will be needed; not to mention the better financial literacy they will learn.

If we look more closely on the numbers and learn its pattern, we can conclude at least two lessons.

First, the higher income the more fund will be needed. It is typical that lifestyle cost of a person tends to increase as income grows. Lifestyle cost directly impacts the required retirement fund, as retirement fund is intended to cover the living cost.

Example: say we are now having an 18 years old child, just about to enter a college. By calculation, our child may need “only” Rp 37 million to set up his/her retirement fund, much lesser as compared to all the numbers in the table. We may give a retirement fund setup to our child as a cadeau to entering college. Another good idea of a gift to our child.

Needed Amount of Retirement Fund (in billion Rupiah)

Second, the sooner we start saving for retirement, the less fund is needed. The sooner we start saving for retirement, we have more time to grow our savings and have more options of saving and investing instruments available. The later we start preparing our retirement fund, time and option are just becoming more limited.

The diagram below helps illustrate the lesson.

18.9

Within 20 years, the money needed to be prepared for our retirement fund could rise 9 times higher

18.2

15.2

 the sooner the better 11.2

7.8 6.3 5.1 2.2 1.1 0.2 35

2.7 1.4 0.3 37

3.4 1.7 0.3 39

9.4

9.1

7.6

5.6

4.2 3.9

3.2

2.1 0.4

2.6 0.5

0.6

0.8

1.1

1.5

1.9

1.8

41

43

45

By Age (years old)

47

49

51

53

55

Rp 10 million income

Rp 50 million income

WHAT CAN WE DO THEN? What can we do upon learning and understanding our number? Here are the recommended steps.

First, prioritizing needs. As we now know our retirement number, we need to identify our other needs in life that will cost us, such as sending our children to school/ college, our children’s marriage, or paying existing debt. We need to have a helicopter view on the cost of our major needs in life. Prioritize those ‘needs-in-life’, from the most important, down to the least important.

Second, allocating income & asset. Know the income, money and other asset we have. Allocate that income, money and assets to fulfil the major needs in life. Consider what we have prioritized earlier. Our retirement fund may be fully or partially allocated, due to fulfilling other needs.

Rp 100 million income

Allocation of income and asset is one of the key milestones in financial planning. When we have set the allocation of our income and asset, we have our financial plan established. Next to do is to maintain the plan, so as to achieve the set goals.

Now we know our number, have some ideas on how much fund needed, know the steps to achieve the number, and to take actions accomplishing it.

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

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