Your Retirement PlanYour Retirement Plan starts with your Financial Freedom Number (or FFN). A simple way of calculating what you need to retire is based on the Dividend Discount Model. If you want to retire on 100,000 per year, here is the amount of capital you will need: Assuming a long term, after-tax investment return of 10% per annum and an inflation rate of 7.5% per annum, you will need an investment of 100,000 divided by the real rate of return of 2.5%(10% return minus 7.5% rate of inflation) which gives you 4,000,000. The amount you would actually need would be a bit less, because the Dividend Discount Model assumes you will live for ever, but it would also need to be increased a bit, to account for volatility in investment value, especially if you have some stock investments or even some debt-based investments. The adjustments could cancel each other out, but if you overshoot, you can always pass on the balance to your kids or to your favorite charity! Having a bit more to retire on never hurt anyone. And if you want to be absolutely sure, you could reduce the real rate of return to a percent or so, to be absolutely sure you will have something to pass on to your kids as also to take care of bad times. It is also prudent to remember that life-expectancy has been increasing at a fast clip in the last few decades, so you can expect to live for much longer than your parents or grand-parents did! Deduct what you have already saved and you will have what you need to save. If you are fortunate enough to live in a country which provides social security or if you work for a company which will pay you a pension after retirement, you can lower your savings target by deducting the expected benefits after retirement from the annual amount you need to retire on. Your next step in the retirement plan is to decide on your asset allocation. Click on the link below after you have got a fix on your financial freedom number. Don't worry if the amount you need to save seems astronomical, remember, I have a plan for you!
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