Planning for Your Golden Years

A Sense for Money

Every one of us should expect to retire one day, either by personal choice or at the behest of our employer. From that day on we will face a momentous change in our lifestyle — possibly even greater than the day we get married or have children. Suddenly we have seven days a week to travel or pursue our hobbies. Maybe we want to move to the mountains or seaside or go back to our home in the village. Perhaps we will even move abroad.

In years gone by, people used to rely upon strong family ties in retirement and depend upon their children for both accommodation and income. But this is becoming less prevalent with changing cultures and dispersed families. The key point is that we need to rely upon ourselves rather than assume our children will look after us in retirement.

One of the biggest changes on the day we retire is the absence of a monthly salary cheque. The bills, on the other hand, continue to roll in — although their nature may change. In fact, working out how much income we will need in retirement is one of the key steps in financial planning. We will normally need a very different level of income to that which we need while actively employed — maybe much more, maybe much less, or maybe about the same. When we are working, much of our income goes on paying the mortgage, paying for upbringing of offspring, buying the family car, etc. — all of which will hopefully be settled by the time we retire. On the other hand, when we retire, some of our costs may increase. Many of us dream of long holidays or visits to long lost friends and relatives in distant places, buying a boat or a holiday villa in Bali.

To help us plan, the first step is to work out how much monthly income we want in retirement. Let’s assume you get 10 million rupiahs a month.

As for the next step, we need to estimate the nest egg that will be needed to give the 10 million a month. This can get pretty complicated. Financial gurus give us lots of complicated algebra with Greek letters and equations to give us the answer but we can get a good sense of this just by looking at some typical scenarios.

One scenario outlines: If you retire at 60 and live for another 20 years then you will spend 20 X 120 million or 2.4 billion rupiahs. Note that this scenario ignores inflation, interest on your nest egg, and other subtleties, but the experts will tell you they more or less cancel out. The main point is that the figures are striking, even frightening. Now run through this for yourself: Your target nest egg could easily be 10 times your annual income.

The final step is to work out how you can accumulate a nest egg of 2.4 billion rupiahs, and how to deal with the uncertainties involved, such as living to 110, dying at 61, prolonged ill health and medical expenses, and inflation along with many others.

If you start saving at age 20 and aim to accumulate a nest egg of 10 times your annual salary by age 60, you should probably set aside around 8 percent each month. Here is a table that will help you decide how to accumulate a nest egg of 10 times your annual income.

Age    % salary to set aside
20                     8%
30                   15%
40                   30%
50                   80%
60               1000%

The exact numbers are the subject of intellectual and mathematical debate, but you don’t need to be a math wiz to get the general idea. The key message is to start young. Obviously, getting a nest egg of 10 times your annual income is a real problem if you start at age 60 — you need to find 1000 percent of your annual income in one lump sum, which is clearly a severe challenge for most mortals. Start when you are in your teens and you will hardly notice the shortfall in income.

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