Investment: When Aspirations Meet Reality By Gareth Milliams

As a financial planner, my job is to turn an aspiration into reality. Unfortunately, aspirations can be very expensive.

This posting looks at the cold truth of pension funding and what is required to fund that income.

People will naturally delay contributing as long as possible by assuming that their incomes will continue to grow as their careers progress. Unfortunately, their commitments grow even faster as they accumulate spouses, children, property and general debt. Planning for retirement gets delayed and the cost of achieving what was relatively easy five years previously becomes prohibitive.

My clients are amongst the highest paid employees in the world. Many have incomes well in excess of $500,000pa by their late twenties.

Most see their career in banking ending by the time they reach 45 or 50 years old. At that point they would like to retire and lead a life of independence in total financial security.

Ask people what they would like to live on in retirement and most would consider half salary as acceptable. Lets assume that the half salary is $250,000pa.

I would then need to calculate the required lump sum in order to achieve the income target.

Assuming that I could get 5% at a bank and inflation was 3%pa, then that would leave me with a net 2%. This would mean I would need to plan for a lump sum of $12.500.000 to provide that income of $250,000pa.

Let me break the figures down:

$12,500,000 lump sum x 5%pa interest = $625,000pa gross

The components that make up the 5% are:

$12,500,000 lump sum x 3% inflation = $375,000pa

12,500,000 lump sum x 2% net return = $250,000pa income

Even $100,000 pa requires a nest egg of $5,000,000. This $5,000,000 is the value in todays money. If you are 40 today and are looking to retire at 55, then that figure becomes $7,800,000.

It is alarming at how underprepared people are for retirement. This is why we always recommend a multistrategy approach combining lump sums with regular savings. The combination of absolute return and compound growth does work if monitored professionally. It takes serious planning and commitment to create financial security.

If you haven't begun a plan, then the financial crisis is your friend. Its combination of heavily discounted markets and high volatility will enable you to play catch up.

Do something. Make it a priority and do it now.