Don’t leave retirement planning to guesswork. And don’t assume that because you contribute to an employer-sponsored fund, or to a retirement annuity (RA), you are on track for a comfortable retirement. Instead, it is important to know in advance what you will receive as a monthly pension and, if you will be living off investments, for how long these are likely to provide an income for you.
For a rough guide or rule of thumb to check if you’re on track to achieve your retirement goal, you should have between 15 and 17 times your final annual salary (before tax) in the year you retire to provide a pension equal to 75% – 80% of the salary.
For example, let’s suggest that you currently earn R15 000 per month. By applying the 80% rule, you will need at least R12 000 per month after retirement in order to maintain your current living standard.
For a more personalized retirement goal, you need to take your individual circumstances into account. Answering the following questions will help you to more precisely determine what percentage of your current salary you will need to meet your expenses in retirement:
- Will you have paid off all your debts, such as your home loan?
- Will you still be supporting dependents such as your children or other relatives who rely on you for their living expenses?
- Will you downscale your home, making the cost of living cheaper?
Then you need to consider if you will need any capital lump sums during your retirement for the following:
- Major expenses in retirement such as the replacement of vehicles or home maintenance.
- Major medical events that may incur expenses.
To achieve savings able to provide a guaranteed, inflation-linked annuity that replaces income equal to 75% of the salary you are earning when you retire, you need to contribute 15% of your salary over a 40-year period and earn a return of 3% above inflation, this is how starting at a higher age will affect the percentage of your salary that you need to save:
- 15% of your salary if you start at age 25;
- 19% of your salary if you start at age 30;
- 24% of your salary if you start at age 35; and
- 33% of your salary if you start at age 40.
To ensure that you do not outlive your savings you have to rely on a safe withdrawal rate. According to this rate, you should be able to withdraw 6% of your portfolio yearly without having to use any of your remaining capital. Based on a 6% annual withdrawal rate after retirement, the amount you will need to save in rand terms will look something like this:
R12 000 x 12 months = R144 000 (annual income) ÷ 0.06 (6% safe withdrawal rate) = R2 400 000
One of the biggest variables that may affect your retirement planning is inflation. If you do not properly compensate for inflation in your portfolio, you may fall short of your required total after retirement.
Let’s assume that you are 40 years old and you plan to retire at age 65 (25 years). By using the top of the South African Reserve Bank’s target range, the best calculated guess on annual inflation is around 6%. What this means, is that if your current needs dictate that you require R2 400 000 to retire in today’s rand terms, you will actually need R10 715 928 in rand terms when you retire in 25 years’ time, when you take inflation into consideration.
The bottom line: To ensure you retire with adequate funds, you need to actively take charge of your financial future and, ideally, start saving for it as early as possible. If you are already saving towards your retirement by contributing the maximum towards a retirement annuity or pension fund, you have a good head start.
Materials Used and Further Reading
How much do I need to retire comfortably?
The easy way to calculate how much money you’ll need to retire
How much do you need to save for retirement?
This Is How Much Money You Need To Retire