How much do you need to retire?
Most South Africans who retire from work are facing problems as they don’t have enough money to use after retirement. It is ideal for any worker to have a savings account where he/she can put his savings which they will use when they retire. This has enabled some companies to conduct workshops that are designed to assist such people. Some banks have gone as far as opening accounts that are tailor made for such people.
At an investor road show, Richard Carter, head of product development at Allan Gray, provided some figures to illustrate how much one should already have saved for retirement, based on your current age.
Carter worked on the assumption that to retire with 75% of your current salary in retirement, you need to have saved 17 times your salary by the age of 65. To be on track to reach that figure, after ten years of working, say around age 35, you should have saved twice your total annual salary. After 20 years of working, around the age of 45, you need to have five times your annual salary put away for retirement. For example, if by the age of 45 you are earning R400 000 a year, you should have R2 million in your retirement fund.
Important numbers to keep in mind
For those of you who have just recently started working, these are important numbers to keep in mind. The only way you are going to meet your required retirement target is to invest at least 15% of your income towards retirement and to never cash it in when changing jobs.
In fact, the main reason most 30-plus individuals find themselves under-funded for retirement is that they cashed in their retirement funds in their early 30s. Carter illustrated that over a 40-year working life, if you start your retirement savings ten years later, at the age of 35, your final lump sum in retirement will be half that of someone who started saving from the age of 25. That is not just because you had ten extra years of contributions, but because those ten years have had a longer time to benefit from compound growth.
But what about those who cashed in their retirement funds when they shouldn’t have? All is not lost, if you follow these tips:
- Start using salary increases to boost your retirement provision rather than your lifestyle. You can invest up to 27.5% of your salary tax-free.
- Adjust your lifestyle so that your living expenses are more manageable in retirement. If you only need to live off 50% of your current salary, then you could survive on a lower retirement lump sum. Keep in mind when doing these calculations that you need to double your current medical costs, as these rise significantly as we age.
- Think about ways to extend your working life. If you can earn an income until the age of 70, even if it is just enough to supplement your retirement income, you can make your retirement funds last longer.
- Ensure you invest in growth assets that deliver returns above inflation.