Friday 15 June 2012

Figuring out the Future

At some point in everyone’s lifetime the need to organize ones finances becomes more important.  Whether it be for children’s education, retirement planning, property purchases or succession planning to leave monies to your next generation it is important to address such matters as early as possible so as not to leave anything to chance.  Most people put off planning for these extremely important life events because it is challenging to figure out how much one will need for life events with changing variables all the time.  Such variable could include inflation, geo political or in the case of retirement, how long will one live, the length of ones working career, the company pensions, National pension and will there be enough in there for me?

How much money will I need at retirement?  It’s a hard question to answer as there is no one formula that will apply to everyone. However, taking advice from an experienced financial consulting company like Meyer International in Bangkok can help you out. A generation ago things were a little easier.  Provision for retirement seemed a simpler matter as their lives were less varied, the welfare state more stable and medical technology was more limited.  Now people are living longer, economic and technological developments changing.  Going forward, each individual will determine their own picture of retirement and will be responsible for financing an increasing and ever more expensive share of it themselves.  The earlier one gets planning for retirement the better and picks an amount of money that will provide you for a good life 20-30 years after you retire. 

When starting your planning process as a 1st step, ask yourself about your own wishes and goals.  How and where would you like to live in your later years?  Is there something you have always wanted to do but not had the time?  What really makes you happy?  Does my spouse have the same ideas as I do and how does he/she think about such questions.  Of course the answers to such questions are very individual.  Maybe live in the country or in the city and then another country part of the year, maybe you want to move abroad entirely?  Hawaii, Thailand, Europe?  The point of such questioning is to become aware of what is important to you. 

Second step involves analyzing where you are financially and what it will take to accomplish and fund your retirement activities.  Time to get out the pencil and balance your living activities today while making sure there is enough put away to balance out retirement activities.   Add up the costs of the current housing expenditures, insurance, food, healthcare, insurance, household necessities, vacations, cars, air flights etc. If you think that perhaps when the children are not there there may be more available, let’s not forget that you may be traveling more in retirement days and so the bills go up there, the costs of healthcare that could severely escalate in the event the Social systems are no longer as they are today.  Once adding up these costs you may get an idea of how much you will need on a yearly basis but how do you provide that income when you are no longer working?

According to certified financial planner Richard Cayne, one needs to do some clear planning on how to finance such activities taking into what annual income will be available when you retire based on current conditions and then discounting that in case conditions change.  Certainly the two biggest factors are that as medical advancements progress and people are living longer means that we have to be able to finance those extra years somehow.  As people are living longer and the global population is aging *particularly so in Japan* there is ever more burden on the social pension systems with less people paying into the pot and more people drawing on it.  To be very prudent discounting the benefits one might expect from social pensions by up to 80% would be a safe bet.  On top of this all add to it inflation which some say at 2% per year but with rising food, energy commodity and labor costs rising at a very fast pace 3% would be far more conservative.

To calculate the amount of personal investment capital that is needed to finance your later years assuming your personal investments are well diversified you can potentially expect to average annual returns of 5-8%.  If for example an investor wants to fill the yearly income needed at retirement of ¥30,000,000 based on an annual drawdown rate of 5% he or she would need capital of ¥600,000,000.  Now you should get an idea of how much you will need for retirement funding.  The reason a twenty times multiple has been used is because it is assumed one can get an 8% yearly return on ones portfolio and with 3% going to inflation leaves one free to drawdown the 5% for their income needs.  In this way ones portfolio can theoretically carry on and you can succeed the entire amount to your loved ones without having diminished it yourself over your lifetime.

Finally drawing up a financial plan to build up to your goal should be done carefully and with the help of specialists like that of Richard Cayne Meyer Asset Management Ltd who can help you develop your personal financial plan and then help implement and review it periodically to make sure it changes to suit your ever changing conditions.

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