What is your run rate?
What is your run rate?
Summer is here and so is the cricket season, much to the disgust of many wives across the nation, whom were starting to enjoy peace and quiet after footy season finished in November!
However, watching the cricket over the past few weeks has reminded me of how financial planning has a lot in common with cricket.
At it’s simplest, financial planning is about getting you from Point A - where you are today, to Point B - where you want to get to.
What you need to do (save/invest) to get there?
Or are you 40 years of age and want to retire at age 60 on $100k income per annum?
What do you need to do to get there?
What’s your required run rate?
And this is where cricket comes in…
Pretend you are the team batting second in a T20 game.
The total that the other team made is the goal. In money terms, it’s the lump sum you need in order to achieve a comfortable retirement.
At the start of your innings, you have a required run rate.
In cricket terms, this is the amount you need to score each over in order to achieve your target.
However, from a financial planning perspective, this is derived from two things:
The amount you need to save every year (based on average rates of return) in order to achieve your retirement lump sum
A reasonable expectation of growth on their existing capital.
You may calculate with your financial planner, that you need to save $30,000 per year in order to achieve your desired sum of capital at retirement.
This contribution, coupled with the estimated growth on their portfolio will give them a high degree of certainty around achieving their desired lump sum.
Your Newcastle Financial Planner can plot this on a graph and show you where you expect their capital to be every year leading up to retirement.
The innings commences
In cricket, after the first over is bowled we review everything and the required run rate is re-calculated.
If you needed 9 an over and only scored 5, it will increase. If you scored 18, it will decrease.
After a year of saving for retirement, you would review your situation with your Newcastle Financial Planner to understand how you are tracking towards your required run rate.
Did you save what you needed to and did you get the returns that were required?
Are you where we thought you would be on the run chase, are you behind or in front?
If you were to experience poor investment returns and are falling behind the required run rate, what can you do?
In cricket, there is only one option - hit more runs!
In financial planning, there are a few more options.
The financial equivalent of more runs is more money, which is to save more to top up the difference.
Alternatively, you could seek higher returns either by taking on more risk or opt to continue your current investment strategy with the view that markets will recover.
And just like cricket, there is no need to panic after just one over if your run rate is behind where you need to be.
You have got another 19 overs to go, just like you, who is now 41 years of age with the goal to retire at 60.
In cricket some setbacks can occur- you can lose a wicket. It can take a new batsman a few overs to get settled in and the run rate can suffer during this period.
This sounds a lot like a market downturn.
But if you lose a wicket early on, and your run rate is already ahead of plan, there is less pressure than if you were later in the innings and behind where you needed to be.
To me, as a sports-fanatic, this concept of retirement savings being like the required run rate in cricket is a simple example that can make it easier to understand.
