By Sydney Sekese, CFP® professional and FPI 2016 Media Award Winner
Last Tuesday, parliament passed a national minimum wage bill, this came after several debates and controversy. Paying fair wages creates a potential for keeping workers healthy enough to do a good job. This got me thinking- The paycheques that we receive during our working life do not end the day we retire. We still rely on paycheques long after retirement. Why do I say so?
First, let me share with you an intriguing principle. Have you heard of the 40│ 40│ 40 principle? This relates to what most of us experience: We roughly work 40 hours a week, working for 40 years of our lives, and then retire on 40% of what we made (the average replacement ratio). No wonder we have the old adage “life begins at 40”. So, you need to take this reality into consideration when designing an optimal investment strategy for a successful retirement journey.
The paycheques explanation takes the form of a realistic story. Let me take you down memory lane: when you are born and dependent on your parents for at least 18 years, retirement appears to be miles apart and therefore lack of provision for this date is often justifiably acceptable.
As you transition from dependency mode, and start working the dependencies migrate to paycheques during your working life and after retirement. It is therefore prudent to start making provisions for further paycheques that will be required as you enter your retirement avenue and well into the future.
If you start working at the age of 23, you have a minimum of 444 paycheques available to make provision for a further 348 paycheques after retirement. This assumes life expectancy of 29 years after the retirement age of 60.
Reality is that some employed individuals only start accumulating their retirement savings at the age of 35 and therefore only have 300 paycheques at their disposal. This creates paycheque “deficits” after retirement. At this stage they would have accumulated capital to cater for only 288 paycheques instead of the potential 348 paycheques.
The situation becomes dire for those with no formal retirement fund structure who often consider retirement aspects at the age of 45. This is a devastating situation as an individual will only have access to 168 paycheques to consider. This is often too late close the huge gap of 348 paycheques needed after retirement
So, we need to be careful to maintain and sustain our paycheques during our working life as we need to make provision for further paycheques long after retirement. This requires us to preserve the accumulated retirement benefits each time we change jobs. We should not be tempted to take cash each time we job hop as it will impact on the much needed paycheques later in life.
The type of annuity income and therefore the level of paycheques enjoyed during retirement need to be sustainable and sufficient considering the potential extended life expectancy at retirement date.
Maintaining and sustaining your paycheques for life starts with having sound financial goals. Money is a tool you use to build a life you want to live, not something you use just to buy more stuff. You should draw a picture of what you want your life to be in five, 10, 20 years and then use money to craft that life. All too often, we only think of the things we want to own, like cars or a particular house, rather than what we want our lives to be.
For most people, this idea involves figuring out when you might be able to retire or reach financial independence. Whether your goal is paying down debt once and for all, retiring early at 55, or paying off your house, it helps to write those goals down. Only then can you create a realistic plan to make all your dreams come true.