| In a broad context, prudence is a virtuous principle | | | | diversified retirement portfolio would do well to |
| that brings to mind careful consideration and | | | | return those figures on average over a long |
| foresight-among other things. In terms of | | | | period. Therefore, it is actually better to |
| economics or accounting, prudence is a | | | | understate your accumulation rate, instead of |
| fundamental principle that facilitates estimation in | | | | overplaying it when plugging in your figures. |
| an uncertain context. It advocates that you | | | | == Target percentage of pre-retirement income |
| should not overestimate your possessions or | | | | == |
| underestimate your liabilities and expenses. | | | | When you retire, you should have an idea of |
| As such, we can understand how prudence plays | | | | what percentage of your retirement income you |
| a significant role in a retirement calculation. A | | | | wish to receive. For example, if you have |
| retirement calculation uses the premise that you | | | | ambitious retirement plans, you might wish to |
| can use present information for planning purposes. | | | | retain 100% of your last income before |
| No one can argue that the future is certain. Since | | | | retirement. Since many pre-retirees do not |
| a retirement calculation requires you to determine | | | | properly consider this aspect of planning, they |
| or estimate a number of variables, it is important | | | | often call an arbitrary percentage or one that is |
| that you avoid creating a pretty picture by | | | | understated. Since there are many risks of |
| favourably overstating and understating critical | | | | retirement, it is far better to reclaim a higher |
| variables in the calculation. | | | | percentage of your pre-retirement income (closer |
| ==Your salary/ salary increase == | | | | to 100%). Although some of your retirement |
| It is generally easy to use a fair estimate from | | | | expenses may be reduced, you have |
| you salary, especially if your salary or salary | | | | post-retirement inflation and health risks with |
| increases are consistent and predetermined. | | | | which to contend. |
| However, some persons have variable income | | | | Several other instances might require you to |
| and/or variable salary increases. In cases like | | | | apply prudence when performing a retirement |
| these, it is important to be prudent. If you are in | | | | calculation. The important thing is to avoid |
| a commissioned job, you should use an average | | | | presenting an unrealistically favourable estimate of |
| commission, since using your lowest or highest will | | | | your financial readiness for retirement and allow |
| skew your retirement calculation. For those who | | | | you to perceive a realistic worst-case scenario. |
| do not have preset salary increases, it is better | | | | When doing your retirement calculation, you are |
| to use a salary increase rate that is on par with | | | | free to juggle certain figures, such as your |
| inflation at minimum. | | | | average accumulation rate. You should juggle as |
| == The rate of inflation == | | | | many variables as you could to provide a |
| The rate of inflation is a critical aspect of the | | | | worst-case estimate of your financial readiness |
| retirement calculation as well. It determines | | | | for retirement. |
| whether you can maintain purchasing power with | | | | Think about all the pre-retirees and retirees who |
| your retirement income. However, inflation | | | | did not make any provisions for the economic |
| fluctuates regularly, making it necessary to use a | | | | downturn of 2007/2008. Those who were |
| projected average for future inflation. According | | | | prudent would have understood that such things |
| to the principle of prudence, since inflation has a | | | | can happen. Even though they were still affected, |
| negative effect, it is better to overstate it, so | | | | they would likely have limited their losses by |
| that you can easily adjust to worst-case | | | | managing their risk carefully. Retirees who were |
| scenarios. | | | | optimistic instead of prudent suffered substantial |
| == Your average accumulation rate == | | | | losses and had no idea how to recover. |
| Many persons would love to get rates of return | | | | Establishing prudence in your retirement |
| of 12% and 14%. Indeed, it is tempting to use | | | | calculations prevents you from unpleasant |
| such ambitious figures when performing a | | | | surprises arising out of a harsh reality check. |
| retirement calculation. However, a sensibly | | | | |