A headmaster of a government school who is considering the early retirement severance package, recently asked Personal Finance for advice on whether he should take the package.
The headmaster is 53 years old, has three teenage children with two still at school. He wants to receive about R6 500 a month after tax at retirement and has very little in savings.
The value of the retirement package is about R740 000.
Can he retire? The answer is a flat no, unless he is able to find another source of income.
John Kinsley, of Syfrets, says the rule of thumb for retirement is that you need capital equivalent to 10 times your required annual income in order to maintain the same standard of living.
This is a rough guide. The actual amount depends on issues such as how many dependants you have, your assets and debts and how much tax you pay.
Obviously, in taking the early retirement package, you would first subtract the amount you would receive as a monthly annuity (pension) and then work out the lump-sum amount you would need on the difference between the monthly income you require and the monthly pension.
Kinsley emphasises that it is important to have a needs analysis done to assess your particular needs.
Financial adviser Lewis Chesler of Financial Workshop (Cape) says another method is to use the five percent real return rule (the return less the inflation rate). He says if you assume a higher return than five percent you run the risk of running out of capital later on. An example: five percent of R740 000 is R3 083 a month well below the required R6 500 a month.