Opinion – Grain in Grain: Discover the best route to have a peaceful retirement

It is common knowledge that the shortest distance between two points is unique and described by a line. However, when we talk about investments, the solution to this problem of connecting the dots is not so simple. This is because there are three additional factors that need to be taken into account and they are subject to each individual’s restrictions.

In yesterday’s article, we already started the discussion of the challenge of creating a route or path to your peaceful retirement.

We understand that the first step is to set a goal. Some readers have sent me questions and suggestions for this point. I will return with them in the future. Today, we’re going to focus on learning how to simulate your optimal route. So, let’s take the end goal as given.

Following our example from yesterday, let’s assume that you want to retire with a monthly income of R$10,000. For this, we saw that it would be necessary to have an equity of R$ 3 million just before retiring.

As we said yesterday, to define the path to your retirement, four factors are needed: starting point, rate of return, monthly contributions and time until retirement.

The starting point is not all of your current financial wealth. But, just the financial value you have in financial investments destined for retirement. Realize the constraint.

Don’t be fooled into assuming that all your investments are for retirement. Part of your assets is destined for other intermediate purposes.

Unlike the other factors, the initial equity is already fixed, as it is restricted to what you have today.

In our example, let’s assume that you currently have R$50,000 set aside for retirement as your starting point.

All factors have some sort of choice limitation. Another factor that has a stricter constraint is the rate of return on investments. It needs to be chosen according to your investment profile.

Therefore, if you are a conservative investor, there is no point in considering a rate of return that is very different from what you get on federal government bonds.

Likewise, even if you are an aggressive investor, it is not recommended to consider a rate of return greater than twice the rate of a long-term government bond. For example, in the US, the S&P 500 over the last 20 years has not yielded even 50% more than a 20-year US government bond.

Over the past 20 years the S&P 500 has yielded the equivalent of 8.5% a year and the ETF representing 20-year public bonds with maturity, yielded 6.25% per year.

Thus, it is recommended to choose a return between 100% and 150% of the interest rate return of a federal public security referenced to the IPCA.

Let’s assume you are a conservative investor. Thus, the rate of return to be used must be 5.3% per annum above inflation. This is equivalent to a yield of 0.43% per month above the IPCA. You should always use real rates, ie above inflation, in these simulations.

The other two factors can be simulated, as they can vary according to your desire or characteristics. For example, if you are young, you can choose longer deadlines for starting retirement.

You may also wish to reach retirement equity earlier. Understand that reaching retirement equity doesn’t mean you have to stop working, but you have freedom of choice to do what you like.

Let’s say you’re 30 years old and you want to reach your retirement wealth at age 70. Therefore, the investment period would be 40 years, or 480 months.

Now we need to find out, considering all the other variables, what would be the amount of monthly contribution needed.

For this, we are going to use a financial calculator. If you put the word “HP 12 C emulator” in internet search engines, you will find a number of alternatives. I usually use the one available on the link.

Let’s go through the steps on the calculator:

Step 1: Enter the initial equity value (50,000) and press PV. This key represents English Present Value. Look at the figure below. The blue arrow shows the key PV.

Step 2: Enter the final value of 3,000,000 and press the key CHS and then the key PV. The key CHS represents sign change and PV means future value. See the figure below. The blue arrow shows the keys CHS and PV.

The final amount must be in a negative sign, as it represents an amount that you would redeem at the end of the term.

Step 3: Put the rate of 0.43 on the display and press the key i. This key represents interest rate in English. Pay attention to the figure below. The blue arrow shows the key i.

Step 4: Enter the term of 480 months and press the key no. This key represents the number of periods. See the figure below. The blue arrow shows the key no.

Step 5: To find out the value of the monthly contributions, click on the button PMT. This key represents the value of periodic payments. See the figure below. The blue arrow shows the key PMT.

By clicking on the PMT key, you will find that the amount in monthly contributions is R$ 1,638.82.

Note that you can do the same steps, but changing the variable of interest. For example, you can change Step 4 by putting the value of the monthly contributions that you support and in Step 5, clicking on nodiscovers the period in months until reaching the objective equity.

With that, you have your path to peaceful retirement built. Now, you must put it into practice immediately, because each month you postpone is a month lost and that must be compensated either with greater investment effort or with an older age to retire.

If you properly plan and implement this route, you will reach your retirement with peace of mind and enjoy many years of peace. The effort pays off, I assure you.

As promised yesterday, today (this Monday, February 7th) at 6:18 pm, on my Instagram, I will answer your questions about how to plan the route to your peaceful retirement, exclusively for De Grão em Grão readers.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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