Question

1.14   Retirement income :

          On a personal level, assess the level of income you think you would need – at a minimum – when you retire. Do you agree with the notion of 62.5% of pre-retirement earnings to be an adequate measure? If a person earned $100 000 prior to retirement what level of capital is required to produce 62.5% of such an income? (Assume a rate of return of 6% p.a.)

Answer 1

A rate of 62.5% of pre-retirement earnings is feasible but it is at the lower end of the replacement ratio recommended. If a person earned $100 000 prior to retirement the level of capital required to produce 62.5% of such an income is (Assume a rate of return of 6% pa.)

100000*62.5%=62500

Divided by 6% = $ 62500/.06 = $1041667

Therefore, $1041667 is the total amount of money required upfront to pay for an annual retirement $62500.

This assumes an average net return on investment (after tax) of 6%.