When the value of your investments decline and you start contemplating your old age, you may start to worry about your ability to support your lifestyle right up until the end. It is this uncertainty that creates unnecessary stress and sometimes irrational decisions. Human beings like to know what will happen in the future and even if the news is bad, we would rather know about it and start making plans to sort out the problem. Most people are exceptionally adaptable to change and once they get the nudge, they can perform miracles. We only have to look at the current water crisis in the Western Cape and how people rose to the challenge to see this in practice.
So, if you lie awake at night after watching CNN and seeing markets go down and the rand crashing, it may be time to once again see how far your investments will take you, given your current income and expenditure patterns. At JWR we have IT programs that can do a basic calculation and scenario planning regarding your future cash flow. To illustrate this, take the following scenario:
- You are 50 years old
- You earn a passive income but have a shortfall of R25 000 a month for normal household expenses which you have to fund from your investments.
- You have to replace your car every 7 years for which you need to draw a lump sum of R200 000 from your investments.
- You expect to live until 95.
- From age 80 you will need an additional R5 000 a month for medical expenses.
- You need an additional R30 000 per year for holidays.
The question is how much money you need to have invested now to last you until you are 95?
Because we cannot predict the future, we have to make some assumptions about the average return on your investments and the inflation rate in future. For these assumptions we can only use history as a guide and be conservative. So, if we assume your investments will grow at 2,5% above inflation on average for the next 45 years, you will have to have R10 000 000 invested today to last you until age 95.
If this is bad news, you can start adjusting your lifestyle now. For example, if you have only R5 000 000 invested at the moment, you can either:
- Earn an income for the next 15 years and not use the return on your investment until you are 65, when you can start drawing R21 000 a month for household expenses as well as R150 000 every 7 years for cars, R30 000 a year for holidays and an additional R5 000 a month for medical expenses, all in real terms; or
- Make sure that you have a passive income for the rest of your life and start drawing only R15 500 a month from your investments without the need to withdraw anything for cars, holidays and additional medical expenses.
Prudent financial planning goes beyond just getting returns on your investments, it also involves managing your lifestyle and updating your plans regularly for unforeseen changes.
