The cost of retirement

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  • Key calculation: how much will you need?

    Key calculation: how much will you need?

Do you know what it will be for you? This week and next we discuss various methods from Do-It-Yourself easy to complex modelling systems that can be used to project where you will be in retirement.

First, you will need to know what the your costs for a minimally satisfactory lifestyle are.

Why minimal? Well, if you know what you can get by on, any additional revenue (or decrease in expenses) becomes a bonus. In other words, always start with the worst-case scenario and calculate upward from there.

How to determine what these expenses are and will be? We gave you the key a week ago, remember?

Last week, Moneywise wrote about the cost of living in Bermuda. Then, we asked (begged, pleaded) for RG readers to take the MW Cost of Living Survey and send it to me. The results on a broad base will be discussed in early June. A number of lovely committed people have done just that.

Thank you so much, you all know who you are. What about the rest of you, how about it? Yes, I know it takes time, but the more people that contribute the better the overall results. Plus the results can be used for your own retirement planning.

There is still much time (until May 22, 2017) for many more of you to participate. To see the Bermuda Cost of Living Survey, look on the online version of this article at, under Related Media.

Figure out your monthly (annual) household costs; then, compute increases or decreases in a year for these costs. Fill out the survey and e-mail it to me at, or drop off a hard copy in a plain white envelope (no names) at The Royal Gazette offices on Par-la-Ville Road. Your results give me two numbers. Actual costs today, and the percentage inflation rate going forward.

Retirement and future goal planning calculations: from very, very simple to the very sophisticated models, there are a number of ways to accomplish this.

Major factors to include are current income, total dollar value of current savings, investments, pensions, etc, and current expenses.

I always encourage readers, clients, and anyone interested to just focus on these, you can always interject other extenuating items such as an inheritance (we should all be so lucky), job promotions, paying off of the family home mortgage, university / private school costs, relocation to a cost-efficient country, and so on.

The composite couple financial picture will be on next week. All right, so Moneywise is modestly famous for using illustrative composite cases to highlight how ordinary people perceive all things financial. Why? Because, while there are literally millions of financial websites and advisers out there, some writing competently about retirement, others parroting the same old tips in order to push investment products, very, very few use examples of real people struggling to solve a real financial problem planning for retirement.

Readers have mentioned consistently over the years that composite cases help (and sometimes amuse) them in relating to their issues.

Why try to calculate what you will need later on? Some would say why bother, life can get so complicated. But why not, at least, have a sense of how your financial position will shake out in five, 10, 20 years. These exercises will work for any personal financial goal, not just for retirement.

How do these calculations / calculators work?

Many retirement calculators are based upon assumptions and projections for both expenses and income. The projections are calculated using an inflation factor for expenses, ie how much do you think health insurance, for instance, will increase each year for ten years? Income, how much will your savings, investments earn or appreciate over the same time frame.

This boils down to straight math meaning: what is the future value of a composite couple’s investment account? Straight math, however, also means straight line (deterministic) where say a couple’s total savings is multiplied each year by a projected interest rate of 3 per cent. But what to do with unexpected costs, or say paying off a mortgage, or increased costs for university — they aren’t in today’s equation.

But, the future is not yet determined, it is not a straight line, we cannot predict it, but we can put in ‘what-if’ variable situations that will provide more than one outcome (maybe as many as 1,000 possible outcomes), as well as comparing the projected financial situation simulation outcomes.

What if my investments return 3 per cent in the first year, a loss of 5 per cent in the second, a gain of 12 per cent in the third, then only 1 per cent for three years running? My expenses can increase all over the math map, depending upon inflation or not. How do these variable percentages affect my future investment and savings planning any differently than just straight line math?

There are generally six ways to calculate managing your retirement lifestyle.

One, pure back-of-an-envelope division: simplest, probably the least accurate, lots of distortion, yet some do use this method. Your inflated savings divided by your inflated expense minus annual pension income equals how many years the money will last.

Two, comparing your monthly net asset balance every month: if you have more savings at the end of the month than the beginning of the month, you’re OK, Jack.

Three. DIY project where you calculate future value of income and expenses each year using a simple spreadsheet.

Four, ubiquitous internet retirement calculators: the numbers tend to be so large for retirement needs (£1 million plus) or skewed because there is a built-in tax effect or wrong inflation assumptions, the individual is totally discouraged about the future.

Five and Six — theses retirement calculators have based their methodology on stochastic modelling, or more commonly known as Monte Carlo simulation: you can guess where that name came from! These Excel or other software applications are for the mathematically inclined, or the pure determined inquisitive individuals.

The Flexible Retirement Planner, for the layman, free, but a nice idea to donate $10 or $20 if it gives you a far better retirement/goal picture.

The Higher End Professional Financial Planning and Wealth Advisory Software solutions: for example, WealthTrace, a lower cost service for both professionals and individuals, and others such as Financeware and Palisade that are professional firms that provide assistance to the advisory industry using advanced Monte Carlo software and related items ( )

Next week: two finalised simple worksheets to work out your future financial picture, and a work-through of a Monte Carlo example all using a composite couple illustrative case.

Caveat: keep in mind two things. All calculators are based upon careful assumptions and projections, the numbers are not absolute. However, good retirement planning says you should recalculate your personal picture every year.

Martha Harris Myron CPA PFS JSM: Masters of Law — International Tax and Financial Services, Pondstraddler, Life™, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact:

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Published Apr 22, 2017 at 8:00 am (Updated Apr 22, 2017 at 8:22 am)

The cost of retirement

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