Retirement Planning - How To Go About It.

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Let's look at the basics of establishing an offshore structure for making sure that you will have sufficient capital set aside to cover all your income in retirement.

There are more than a couple of ways of looking at this. I will look at two basic methods which I call the "technical approach" and the "not so technical approach".

The not so technical approach is easy.

1. Decide how much you want to save each month and at what age you want to retire.

2. Set up a pension plan with a company you feel comfortable with.

The problem with this approach is that you are not establishing any targets or goals and this means you will likely fail to plan properly. The old adage, "those who fail to plan, plan to fail" springs to mind!

THE TECHNICAL APPROACH.

Decide what level of income you would need when retired. The best way to do this is in today's terms, so if today were the day you retired, decide how much annual income you would need/like to have.

Let's say for arguments sake, the figure is US$100,000 per year and you plan to retire at age 65. We need to make certain basic assumptions on the annual level of inflation in the country that you intend to retire to and the average annual level of growth we can make on your money. Working on a UK retirement and that annual inflation averages 3% per annum from now until you reach 65 and that you are currently aged 40 means that you would actually require US$209,377 per annum to maintain today's purchasing power.

We then need to calculate how much money you would need to accumulate over the next 25 years to provide that income and again there are many variables here such as whether you would require preservation of capital and just live off the interest or whether you would buy an annuity from an insurance company which means using your capital plus interest to provide a lifetime income. The latter would mean that you would not need to accumulate quite so much capital but the former is clearly more attractive. The former is also easier to calculate. Assuming an annual return on investments in retirement of 6% you would need to have capital of just under 3.5 million.

Funding that through one pension savings plan is likely to be something of a burden but of course, in reality, almost everything you invest between now and then will eventually go to providing your retirement income or reducing the cost of living such as providing a home so you do not have to pay rent or a mortgage.

EXAMPLE OF A GOOD PLAN.

I assume that you have already seen my web site but if not, you might find it useful for additional information and background. www.offshoreinvestment.org

The basic starting point for most people is the establishment of a regular savings regimen because if you never do anything else but this, at least you will have something to fall back on. So many times, on maturity of a savings plan, I have had the comment, "at first it seemed a heavy commitment but after a while we did not even notice the premium going out of our account and without this, we would have saved nothing at all over the last XX years"

The debate rages on about whether your regular savings plan should actually be set up to run from now until the actual date you intend to retire and many people feel that with 25 years to go, a 25 year plan is way too long in the future and so some people set up their first plan to run for just ten years and then revisit the options from that point. Others have told me that if they did that they would most likely take the cash out at the end of the ten years and spend it, so it is a personal point of view thing and one that needs discussion.

Let's assume though that a plan established to run to age 65 is decided upon and that the aforementioned figures are the basis of our planning. A quick run through on a standard retirement planning computer programme would tell us that you would need to set aside a level monthly investment of US$3,297 per month assuming that the average annual return on investments was 10%. Heavy.

• If you opted to have the premium amount increase each year by 5% per annum, the monthly requirement at outset would come down to US$2,163.

• If you opted to have the premium amount increase each year by 10% per annum, the monthly requirement at outset would come down to US$1,299.

Depending upon your circumstances, the figures above will either look outrageously high or easily do-able. The point is though that everyone's situation is different and having gone through this process many times with many different people I can tell you that 99% of the time, we get back to the "NOT SO TECHNICAL APPROACH" described at the beginning.

At the end of the day, setting up a pension plan is all about establishing a regular commitment to save X amount over a fixed period of time and that usually boils down to how much are you comfortable with right now and more importantly, is that amount likely to remain comfortable for you even if you leave your expat assignment next year and go back to your home country to work where you will be paying tax and probably making a good deal less money in the first place?

Here is what generally actually happens. Realising that something needs to be done, the individual examines their budget and comes up with a figure that is technically sustainable no matter what happens. Let's say this figure is US$500 per month.

Our same computer programme tells us that the level monthly contribution of US$500 will be US$509,983 at age 65. If this could be invested at age 65 at 6% per annum, it would create a retirement income of US$30,597 without touching the capital. You could get more if you were happy to forego use of capital in the future.

This is the important part. If you never did anything else towards your retirement funding and this did what it said it would do then you could survive, right?

Once you have that plan established and as long as it gets monitored and tweaked, then you could reasonably expect to build up a far better fund than that estimated because as you get older, you become better paid and start to get more scared about the future and so you either;

1. increase the plan contributions on a regular basis
2. make additional contributions on an ad-hoc basis
3. invest with the same advisor in different styles of investments

WORKING WITH AN ADVISOR.

Probably the most important decision you will have to make is who to work with as an advisor when setting this up because whoever that is should be someone who is committed to working with you not just now, when we are setting it up but regularly into the future. It's a bit like running a car; if you don't service it regularly and keep topping it up with fuel and oil, sooner or later it is going to let you down.

FREE ASSESSMENT AND ANALYSIS

To obtain a personalised assessment of your current retirement planning and future requirements to meet your goals or to establish your personal retirement planning goals please email us at invest offshore direct

To browse the plans we offer go to the Expat Pension page