Saving for retirement is a lot like batting first in a cricket match. You know you have to save and you keep saving as you go along, but a question that many South Africans struggle with, is how many ‘runs’ will ultimately be enough to ensure a comfortable retirement?
EXPECTED MONTHLY INCOME
Let’s start at the beginning. In this case, it will be the amount of money you need to live from right now. Most experts usually recommend that you use 80% of this amount as a benchmark for what you will need to cover your monthly expenses once retired. I won’t personally guarantee the accuracy of this figure, but it does give us a good place to start.
For the sake of this illustration, I will keep things as simple as possible, but it will be wise for you to also take into account any possible variables that may affect you personally, such as declining health or the possibility that you may still have to cover mortgage payments after retirement.
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.
SAFE WITHDRAWAL RATE
Unlike food products, human beings do not have a use by date, so we have to rely on a safe withdrawal rate to ensure that we do not outlive our savings. According to this rate, you should be able to withdraw 6% of your portfolio yearly, without having to use any of your remaining capital.
This theory is based on the fact that the historical return on the South African stock market (since 1964) was about 8% higher that the local inflation rate. By limiting your withdrawals to 6% of your portfolio, you should still have an additional 5%-6% growth to cover inflation. 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.
Unfortunately, inflation is also one of the most difficult variables to take into account, as you effectively have to try and calculate something that still needs to happen.
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 we can offer 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.
Finally, the process is starting to feel more like a match where your team gets to bat second, because you now know how much you will need to save each month to reach your retirement total. With the help of a tool such as a retirement calculator, you can simplify this process even further.
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. If not, I suggest that you consult a professional about the options best suited to your needs as soon as possible, otherwise you will have to work much harder later in your life to make up for lost time.
The opinions expressed in this document are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. Although the utmost care has been taken in the research and preparation of this document, no responsibility can be taken for any actions taken based on the information contained in this blog.