Monday, August 1, 2011

Peace of Mind Comes from Shrewd Retirement Planning

Early retirement = danger
Republikein Online, {Namibia, old Southwest Africa} April 13, 2011

THE dream of retiring young, to travel the world and to do all the things you’ve always dreamt of, is not all it seems and may, in actual fact, come back to haunt you. Even though the law makes provision for early retirement, in most cases this option is not desirable and people opting for early retirement tend to run out of money.

The average person lives 25 to 30 years after retiring and then they become dependent on family and the government for an income. A person starting a career at age 20 and works till 60 will receive 480 monthly salaries. If one lives for another 25 years after retirement, another 300 monthly salaries are paid from the pension investment made at retirement.

This amounts to 65% of the salaries earned during a lifetime. As the average contribution to a pension fund is only 7.5% of a salary, it becomes almost impossible to survive in retirement from only a pension plan and additional savings become very necessary. Ideally an individual should save enough money to receive at least 75% of their last salary as a monthly pension. Things to consider when opting for early retirement:

• All contributions to the pension fund stops. This includes the contribution made by the employer.

• The medical aid membership acquired through the company where you work, ceases and a new personal medical aid membership should be applied for – at a higher rate.

• Life and disability cover available through the pension fund the individual belonged to, comes to an end.

• The funeral benefit and accidental death coverage paid for by certain employers, also comes to an end.

• Is your debt, including home loan, paid off?

An individual opting for early retirement should contact his pension fund administrator for a projection of his earnings. This will give him / her an indication on the income to be received. All debt should be paid off as the pensioner will not be able to cover his / her debt with a lower income and maintain the same living standard achieved as a salary earner.

If you would have received 75% of your last salary as income at age 60 and you retire at 55, your projected income could decrease to only 45% of your last salary. This is due to the fact that the interest on earnings in the fund is at its highest in the last five years of the fund. In this period interest is earned on the entire value of the fund and not only on the two thirds that is re-invested at retirement.

In actual fact, only about ten per cent of the Namibian population can afford to go on pension. Also keep in mind that technology increases life expectancy. Inflation will continue to influence the income received as a pensioner. At an inflation rate of 4% it will only be 18 years before you will only be able to buy half of what you can afford at the moment.

The higher inflation gets, the shorter this period becomes. If inflation is 7% (which is considered the worst case scenario), an individual currently receiving a pension of N$5,000 per month, will receive only the equivalent value of N$2,500 in ten years time.

Before considering early retirement:

• Determine how much cash is available to you and remember that no more bonuses will be paid to you. You still have to replace the tyres on your car and the geyser will still break. An emergency fund consisting of about three months’ salary, should be set aside to pay for unforeseen events.

• Consolidate all forms of debt so it can be paid off faster.

• Make an appointment with a financial planner to determine how strong you are financially.

• Find out how much money is in your pension fund and how much will be lost if you retire earlier.

http://www.republikein.com.na/die-mark/early-retirement-danger.125277.php
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"Carpet Bomb" Your Retirement
By the blog author

During World War II, the Army Air Force developed a technique of saturation bombing that obliterated the buildings and equipment on the ground. Enough bombs were dropped to create a firestorm. This was called "carpet bombing," and it was further improved during the Vietnam conflict and during the air war over Iraq.

Most retirement planning involves the notion that an individual or married couple transition from a working income to a full and simultaneous retirement income. So this initial income is estimated and the assumption, often hidden, is that afterward it will be acceptable to live on this "fixed income."

As a retired certified public accountant, the blog author strongly advises you to "carpet bomb" your retirement instead. Set up your retirement so that you are receiving a certain level of benefits and cash – with further cash becoming unlocked and available later, and additional further cash coming into play at an even later date.

Using this approach, financial shortcomings and difficulties down the road are "carpet bombed" with the additional resources that will be available in the future. If you retire, say, at age 62, try to plan to do so without taking social security and without dipping into your IRA. Retire at 62 on your organization’s pension, add social security at 65 and add the IRA at age 70. This is an example of the "carpet bombing" approach. This time-based layering of income is nearly mandatory for anyone seeking to retire in the 50’s.

Another hint: avoid spending a lot of saved cash immediately upon retirement (for a second home, recreational vehicle, boat or around-the-world cruise). Pay off the rest of the mortgage instead. Do not spend a lot of money in the first 24 months of retirement; instead accept the change of status from a working economic environment to a retired environment; once fully used to retirement, consider some large purchases.

Fire any financial planner who thinks carpet bombing is unnecessary or that large expenses early in retirement are perfectly fine.



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