The first step in retirement planning is to figure out how much money you will need annually during your retirement. While this involves certain assumptions and estimations, you can methodically ascertain what your needs are likely to be and calculate a reasonable estimate of your retirement expenses. Inflation is a key retirement risk, and can do serious damage to the financial resources you’re counting on. There are many strategies to help plan for inflation in order to minimize this risk. Assessing a realistic understanding of how much income you will need each year during retirement is the first step to sound retirement planning. Preparing an estimate can give you comfort or be a wakeup call – especially if you discover that your savings are not at the level required to maintain your desired retirement lifestyle.
Retirement is a journey, not a destination
When planning for retirement, here are some key concerns:
- How long will I live?
- How can I make my savings last?
- What are my expenses going to be?
- How do I protect my income from inflation?
- How much will health care cost me?
Life expectancy in the Caribbean
In Trinidad and Tobago, older people (60 years and over) represent 12 percent of the population.
According to the CSO website, in 2011 the average life expectancy for a female in T&T was 78, while for a male it was 72, which means we can expect to live 10 years and beyond in retirement. When planning, it’s important to consider that you may live to be 80, 90, 100, or more! When planning for retirement, here are some key concerns:
· How long will I live? · How can I make my savings last? · What are my expenses going to be? · How do I protect my income from inflation? · How much will health care cost me? · How do I balance my family obligations and still live comfortably?
Your retirement plan needs to cater to your expectations and preserve your lifestyle throughout retirement. It’s important to note that for each year you age, your life expectancy increases.
Historical rates of inflation
As inflation rises, every dollar you own buys a smaller percentage of a good or service.
The value of a dollar does not stay constant when there is inflation. The value of a dollar is observed in terms of purchasing power, which is the real, tangible goods that money can buy. When inflation goes up, there is a decline in the purchasing power of money. The chart below shows yearly inflation rates as well as 10 and 20 year averages.
| YEAR INFLATION | RATE % | AVERAGES % |
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| 2016 | 3.10 | |
| 2015 | 4.66 | |
| 2014 | 5.68 | |
| 2013 | 5.29 | |
| 2012 | 9.16 | |
| 2011 | 5.15 | |
| 2010 | 10.50 | |
| 2009 | 7.02 | |
| YEAR INFLATION | RATE % | AVERAGES % |
|---|---|---|
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| 2016 | 3.10 | |
| 2015 | 4.66 | |
| 2014 | 5.68 | |
| 2013 | 5.29 | |
| 2012 | 9.16 | |
| 2011 | 5.15 | |
| 2010 | 10.50 | |
| 2009 | 7.02 | |
| 2008 | 12.06 | |
| 2007 | 7.93 | |
| 2006 | 8.38 | 10 YEAR AVERAGE = 7.58 |
| 2005 | 6.77 | |
| 2004 | 3.62 | |
| 2003 | 4.00 | |
| 2002 | 4.17 | |
| 2001 | 5.43 | |
| 2000 | 3.48 | |
| 1999 | 3.60 | |
| 1998 | 5.56 | |
| 1997 | 3.64 | |
| 1996 | 8.38 | 20 YEAR AVERAGE = 6.22 |
Inflation and Purchasing Power
Inflation doesn’t literally reduce the number of dollars you possess, but it does reduce your purchasing power. The interest rate your savings account is paying is likely well below the rate of inflation, which means that the cost of goods and services is climbing much faster than the value of each dollar in that savings account. Your investment strategy will need sufficient growth to outpace this higher inflation. People living off a fixed-income, such as retirees, see a decline in their purchasing power and, consequently, their standard of living.
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| Number of years | Inflation Rate | |||||||
|---|---|---|---|---|---|---|---|---|
| 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% | |
| 5 | 1.159 | 1.217 | 1.276 | 1.338 | 1.403 | 1.469 | 1.539 | 1.611 |
| 10 | 1.344 | 1.480 | 1.629 | 1.791 | 1.967 | 2.159 | 2.367 | 2.594 |
| 15 | 1.558 | 1.801 | 2.079 | 2.397 | 2.759 | 3.172 | 3.642 | 4.177 |
| 20 | 1.806 | 2.191 | 2.653 | 3.207 | 3.870 | 4.661 | 5.604 | 6.727 |
| 25 | 2.094 | 2.666 | 3.386 | 4.292 | 5.427 | 6.848 | 8.623 | 10.835 |
| 30 | 2.427 | 3.243 | 4.322 | 5.743 | 7.612 | 10.063 | 13.268 | 17.449 |
What monthly income is required to generate the equivalent purchasing power of $5,000 (in today’s dollars) at a 4% inflation rate?
Figure 2.3: Income required to generate $5,000 over time at a 4% inflation rate
How much future purchasing power will $5,000 (in today’s dollars) have at a 4% inflation rate?
Figure 2.4: Purchasing power of $5,000 over time at a 4% inflation rate
*calculations are approximate due to rounding
How much will you need to retire?
Many experts average that 80% of your pre-retirement annual expenses should provide you with enough funds for a comfortable retirement lifestyle.