The optimal funding for a sustainable living annuity

Two of the biggest challenges and causes of financial stress when retiring are determining how much capital is needed and achieving enough returns to ensure sufficient income for the rest of one's life.

- Marius Fenwick

Add to this the need to preserve capital for spousal income and inheritance, and the challenge and stress levels rise.

We regularly hear that the maximum level that one draws should be at most x or y. We also hear about the importance of beating inflation and the need to take exposure to growth assets.

This is all good and well.

But how much capital should one aim to accumulate by the time they retire, and what returns must they aim for to ensure a financially independent retirement?

To start with a sustainable "pot" of capital that will provide you with either all or a part of your future retirement income requirement, I suggest that you aim for 150% of your required capital.

Determining the magic figure

• Start with the annual income requirement that you wish to receive when you retire;

• Deduct all forms of other income that will contribute towards this figure, like rental property, royalties, defined benefit pension income, etc;

• Divide the remaining income requirement by 5%; and