1. Towards a Successful Retirement Plan
The implications of early retirement capital withdrawals and investment costs on achieving suitable replacement rates at retirement
By Daniel R Wessels October 2013

2. Key Concept
To maintain one’s standard of living at retirement one should have sufficient retirement capital available at retirement to substitute at least 75% of final year’s pre-retirement income with post-retirement income, i.e. replacement rate of 75%...

3. Explanatory Notes
Savings rate = the net savings (after costs) as a percentage of pre-retirement gross income that is allocated each year towards the retirement plan.
Contribution period = the number of years that allocations will be made towards the retirement plan.
Replacement rate at retirement = Post-retirement income as percentage of one’s final year’s gross income before retirement. Typically, it is recommended that a replacement rate of 75% should be ideal to maintain one’s living standard at retirement.
Gross investment portfolio real return = Returns in excess of inflation rate before deduction of fund management, product, administration and advice fees
Net investment portfolio real return = Returns in excess of inflation after deduction of fund management, product, administration and advice fees

4. Explanatory Notes (continued)
  Maximum sustainable replacement rate = based on a drawdown (withdrawal) rate of 6% of retirement capital available at retirement, and considered as the maximum withdrawal rate without adversely affecting the long-term sustainability of one’s retirement plan.
Drawdown rate = post-retirement withdrawals, which is the income paid to the retiree and administrative costs associated with the post-retirement investment, as a percentage of retirement capital.
Early withdrawal = Withdrawing full amount of capital available during pre-retirement phase, proceeds are not used to supplement retirement capital or retirement income at retirement
Investment costs or fees = fund management, product, administration and advice fees as a percentage of investment per annum

5. Early withdrawals and impact on replacement rate at retirement
Net real return of 4% p.a.
Early withdrawals and impact on replacement rate at retirement

6. Gross real return of 6% p.a. ...
The impact of costs on replacement rate at retirement

7. And when considering both early withdrawals and investment costs …
For example, comparing no withdrawals with full withdrawals at n years from the inception of retirement plan and calculate replacement rate attained at retirement for different contribution periods and investment return assumptions…

8. Gross real return of 6% per annum…

9. We can’t always expect high investment returns, or hope it will save the (retirement) day…but we have some control over our savings rates and contribution periods…and early withdrawal decisions, investment strategy/costs!

10. Thinking about retirement planning & “reforms”…
Costs… if one needs a net real return of 4% p.a. over a 40-year period to achieve a replacement rate of 75%, how much “investment cost in the system” can be afforded?
e.g. 3% cost = 7% real on a gross basis, but is that a reasonable expectation?
Consider the cyclical nature of real returns over time and beware that we’ve experienced a period of high real returns in recent times…
Implications for investment strategy?
But can’t focus on the cost aspect only without addressing issues regarding capital preservation, e.g. (unnecessary) early withdrawals…

11. Disclaimer:
Please note that all the material, opinions and views herein do not constitute investment advice, but are published primarily for information purposes. The author accepts no responsibility for investors using the information as investment advice. Please consult an authorised investment advisor.
Unless otherwise stated, the author is the sole proprietor of this publication and its content. No quotations from or references to this publication are allowed without prior approval.