Author Topic: Help with calculations!  (Read 1955 times)

Pension

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Help with calculations!
« on: March 25, 2018, 03:12:10 pm »
See your Compound interest calculator

I gave the following data :
Initial deposit                  5 500 000
Additional deposits                 0
Investment yield                     6.7
Years                                      30
Inflation                                  6.5

The result is after 30 Year I still have my R5.5m ( R5.8m)  left.  Can I assume if I want to draw down 5% for retirement , the investment yield must be 11.7% at least ( 6.7 + 5.0 ) ?

Do you think , with a 50/50 split Global / Local investments , 11.70% can be possible to budget on ?

What do u suggest the investment yield for a budget should be ?

I am 60 now and retired due to health . I have a 50/50 global/local split now. (40% in an LA  , rest in ETF's ) . I have an extensive budget .

So all I am looking for , what yield is possible ??

Please help !











Mr_Dividend

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Re: Help with calculations!
« Reply #1 on: March 25, 2018, 10:23:40 pm »
To be fair, your local also has a huge overseas component - so it's more like 75/25 - which is a good thing. Overseas, a 4% draw down (and upped every year by inflation) is recommended - as in, in almost all scenarios, the person never runs out of money. The further you push it, the more likely you might run into problems. 5% is not too far out, but tweaking the budget might be worth it for the first few years and see how it goes.

Also, of course, look at being tax efficient.

Might be worth putting R500k in a couple of high yielding property REITS - some paying 12-16% - (TEX, DLT, TWR) - might get you close to 5%

4 % on 5mill and 12% on 500K gets to R260K vs R275. That said, the full amount gets added to income vs capital gains rules for the rest so might not be as attractive depending on your tax situation.




Pension

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Re: Help with calculations!
« Reply #2 on: March 26, 2018, 07:54:55 am »
Thanks Mr_Dividend for taking time to help. Every comment means a lot !


 

Patrick

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Re: Help with calculations!
« Reply #3 on: March 26, 2018, 10:34:49 am »
Hi Pension, I think you might be using the calculator incorrectly. The way you've done it assumes no draw down. If you want to test a draw down you should add a negative monthly contribution equal to your draw down. Your 6.7% investment yield is also very low for the JSE. Figures around 15% are more likely over time.

But the 4% rule of thumb is a good one, 5% has been possible in the past many times, and 3% is pretty much foolproof.

Another calculator to use which uses world stock market returns is the C FireSim http://www.cfiresim.com/

It's much more complicated but will give you an estimate on your chances of success.

Pension

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Re: Help with calculations!
« Reply #4 on: August 28, 2018, 02:51:52 pm »
Patrick

If I use your calculator with the following data :

Initial deposit                        13 500 000
Additional monthly deposits       - 45 000 ( 4% drawdown)
Investment yield                                  15% ( like you suggests/thinks )
Number of years                                  30
Inflation                                                 6%

Then I have a result of  R87 441 766,71 (Balance in today's money)

Even if I dubble the drawdown to R 90 000  ( 8% ) it still leave me with R19 253 639,59 in today's money ?

What am I doing wrong?

PLease help








« Last Edit: August 28, 2018, 02:58:20 pm by Pension »

Patrick

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Re: Help with calculations!
« Reply #5 on: August 28, 2018, 04:11:06 pm »
Nothing wrong with the numbers, but you might be assuming that growth will be linear, but it won't. In some years the market will go up 15%, in some up 30%. In some it could go down 40%. On average though, it'll go up.

The 4% rule is there to protect against running out of money. It's not perfect, but it's likely good enough. In most cases, like your calculations below show, drawing 4% a year will have you much richer when you die than when you started, but in most

If the market went up by 15% every year it would make retirement planning really easy, but sadly that's not how it works.

Pension

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Re: Help with calculations!
« Reply #6 on: August 28, 2018, 08:51:22 pm »

So maybe what I must do is : ( with the example amounts mentioned )

1. Start retirement with 4% draw down , say R45000 /month
2. Open a savings account with 6 x monthly expenses (6 x R 45000 = R 270 000 )
3. After year 1, give yourself an increase on R45000 using the previous year inflation rate and draw that form your retirement money.
4. Repeat.............
5. If you have a surplus in any year , put it into  the Savings account ( do not use it )
6. If you short money in , say year 5 , draw from your savings. Not from your LA
7. That should smooths your draw down , and keep the retirement value to do its thing ( up and down )
8. And hope your savings account stays positive
9. Focus on managing your retirement fund

Thanks for the reply.



 






Patrick

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Re: Help with calculations!
« Reply #7 on: August 29, 2018, 08:26:56 am »
That's pretty much the default use of the 4% rule, but there are a lot of strategies that will work. The key is to build in a buffer, either through extra cash or through a little more flexibility to cut costs if needed.

Here's a blog I wrote last month with a different strategy: https://investorchallenge.co.za/the-5-rule-that-has-never-failed/