*This content is brought to you by Wealth Brenthurst
By Tanita Conradie*
It’s easier to master life’s big responsibilities if you understand what you’re doing and why you’re doing it. After raising a family, planning for retirement is probably the biggest financial responsibility we all have, but it’s still a challenge given the overload of information around retirement and the wide range of options to consider.
This can be very dangerous if you feel overwhelmed as you may decide to do nothing for your retirement. This means that your future will remain uncertain until you take active steps to be better prepared.
The first step to better preparing yourself is to educate yourself on the basic concepts that will influence the type of retirement you will have.
To help you understand the key figures around your retirement, here are 4 calculations and ratios that will help you have a clearer view of your situation. These can guide you to better understanding and taking control of your personal finances so you can achieve your goals.
Retirement savings rate
How much of your gross salary do you save each month? Do you know?
The percentage of your monthly income that you should save for your retirement varies. It’s easier, for example, to get involved later in life than when you started your first job. But on average, it’s recommended that you try to save 15% of your pre-tax salary for your retirement.
Your goal should be to accumulate 20 times your last annual salary at retirement age to get by.
Dedicating this amount each month is easy if your employer offers a pension fund that you can contribute to. If you don’t have a formal pension fund, you can still plan for your future by contributing to a retirement annuity or investment fund that will provide long-term growth.
The formula for calculating your retirement savings rate = savings/gross income. Any number above 15% is ideal, and if you’re below that level, it might be time to reevaluate your priorities.
The importance of an emergency fund took on new meaning when the COVID pandemic hit, with many unprepared households finding themselves financially stranded.
The pandemic may have been an extreme event, but even much smaller crises can upend your long-term planning. Natural disaster, medical emergency, job insecurity, and many other unforeseen emergencies threaten to derail your retirement if you’re not careful.
And the best way to protect yourself is to build an emergency fund to draw on in these times of crisis. How much should you have set aside? It depends on many factors, although six months of spending is considered a good target.
Calculating how much you need is simple: multiply your monthly expenses by six to get the amount you need to tide you over that long.
This formula is part of your emergency fund. If you need funds in an emergency, this ratio will look at how easily your assets can be converted into cash. Assets such as our home, car, or retirement savings should not be included in this calculation.
You can calculate this ratio by taking your liquid assets, for example, a checking account and money market funds, and dividing it by your monthly expenses. A preferred ratio should be between 3 and 6 months.
Debt to income ratio
If you want to get a better idea of how you manage your finances, you can calculate your personal debt-to-income ratio. This is a number lenders typically look at when assessing your ability to pay new debt.
This ratio tells you how much of your income you spend servicing debt. It’s recommended to keep your short-term debt (credit cards and loans) at around 30%, although a lower level is always better if you can manage it.
Another important ratio that falls into this category of affordability calculations is your housing-to-income ratio. This shows how much of your income you spend each month on housing, whether you’re paying off a home loan or renting a property. In an ideal world, this number should not exceed 30% of your income.
You can calculate these ratios by dividing your debt or rent by your pre-tax income. If possible, try to include property taxes and home insurance in the calculation of this ratio.
Calculating your net worth is a great way to keep tabs on your ability to accumulate assets.
You get this number by using the formula: total assets – total liabilities = net worth. What that number should be will depend on your goals and where you are in your journey.
However, this number takes on greater relevance if you want to calculate the ratio of liquid assets to net worth.
You calculate this ratio by dividing cash or cash equivalents by your net worth. It is suggested that you keep at least 15% of your assets in liquid or easily accessible form.
Keeping regular, but not obsessive, tabs on those numbers can help you navigate your way to a comfortable retirement. By checking in once or twice a year, you can rest assured that you’re always on track or make changes to ensure you’re back on track.
There are many things to include in a comprehensive financial plan. It is recommended that you seek the assistance of an experienced and qualified advisor to obtain the best information in order to make informed decisions on the changes to be made, adapted to your specific needs and objectives.
- Tanita Conradie, CFP® Professional, is a Financial Advisor in Brenthurst Pretoria [email protected]
(Visited 65 times, 65 visits today)