How much income is needed in retirement?

An often quoted figure is that most people should budget on needing an after tax income equal to at least 80% of their pre-retirement spending once they retire. Put differently, it is assumed that people will spend about 20% less after they retire than they did before they retire.

Is this assumption realistic?

My initial reaction is that some expenses will go up and some will go down - and different people will have different spending patterns. In our own case:

1. the mortgage will be paid off - this is our biggest expense;

2. the children will still be in school or university so this will not change until some years after I retire;

3. food bills will probably go down as I will do more of my own cooking and eat out locally rather than in the more expensive CBD area but I do not expect the difference to be huge;

4. insurance costs will go up. We currently benefit from subsidised medical and life insurance premiums through our employers. This will stop once we retire;

5. other household costs will remain unchanged except electricity which will go up as we will be spending more time at home;

6. we are likely to go out more, travel more and spend more on hobbies simply because we have the time to do so - there will be a significant increase in spending in this area;

7. I have no idea what will happen to taxes in the future.

In short, if the mortgage factor is excluded, I expect our post retirement spending to be higher than it will be before retirement (at least until our children have finished their education and started paying their own way). At least in our case, the 80% assumption is not justified.

Did I miss anything?

Property Project - almost completed

The refurbishment of my latest property acquisition will be completed in the next few days. I will do a final inspection either over the weekend or Monday. The agent has already started showing the property to prospective tenants.

As this is one of two properties currently vacant, the mortgage payments currently exceed the rental income (after outgoings). Hopefully I can get both of the rented and return to a healthy positive cash flow by the end of the month or, at latest, early February. The risk is that if I do not get tenants by then we will be getting close to Chinese New Year which is traditionally a very slow time of year for renting. Also, the lease on a third property expires at the end of February. I really need to try harder to avoid having so many leases all falling due so close together (or buy more properties ;-).

An Unwanted Emergency Fund

I am not a fan of having an emergency fund (at least not the sort that earns a low rate of return sitting on deposit at the bank) in our personal circumstances.

Unfortunately, I am struggling to identify investments that look sufficiently attractive to justify investment. As a result I am accumulating a modest amount of money which is sitting on deposit at the bank earning a rate of interest which is barely above the official inflation rate (and below the real rate of inflation). At least under Hong Kong law I do not have to pay tax on the interest.

Potential uses for the money:

1. increase my monthly payments into mutual funds (currently divided equally between an Asian small cap fund and a European small cap fund). Valuation considerations make me slightly cautious about this although I am still looking for a Vietnamese country fund;

2. make early repayments on one of my mortgages. This will show a better rate of return than bank deposits but with mortgage rates settling below 5% pa (and all tax deductable except for my home mortgage) this is only marginally more attractive than leaving the money on deposit;

3. be patient in the expectations that better opportunities will arise.

The default option is to be patient - although it is irritating accepting such a low rate of return even on a short term basis.