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How much money you need to maintain your lifestyle in retirement in South Africa

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Retirement is usually the last thing on the mind of anyone under 35. Still, experts warn that this lack of planning may be to the financial detriment of the millennial generation.

The average age of retirement in South Africa is 60, but statistics from the latest 10X Retirement Reality Report indicate that only 6% of South African’s are on track for a decent retirement by that age.

“For years, financial planners and other financial institutions have tried to convince young people that they should be putting as much as 20% of their salary aside each month towards their retirement. Saving for retirement should start in your twenties,” said Gus Van Der Spek, developer of upmarket retirement village Wytham Estate.

“Unfortunately, retirement may seem like an abstract concept at that age, and Covid-19 has further exacerbated the situation,” he said.

Why aren’t we looking ahead?

A large portion of the country is barely making ends meet, with no income to put aside as savings. While this is the primary contributor to the low percentage of South Africans on track for a decent retirement, other more subtle factors contribute to why those who can afford to invest in their future choose not to do so.

“We are living in a time of deep uncertainty – made even worse by the impact of the Covid-19 pandemic,” said Van Der Spek. “Many young people are struggling to plan even a year in advance given the current climate – let alone 40 years.”

“Unfortunately, ageing is inevitable, and it is hugely important to have a plan in place when the time comes, especially if you want to spend your golden years in comfort.”

How much should one be putting aside?

Van Der Spek said that while many financial planners advise on putting a specific percentage aside each month, how much one chooses to save should be informed by future lifestyle considerations rather than by a one-size-fits-all approach.

“If we’re talking specifically about the costs of retirement accommodations or housing, there are a huge range of options available – and all at different price points. Before you start saving, it helps to have a realistic idea of the kind of lifestyle you expect to live once you retire and what this will cost so that you can budget accordingly,” he said.

For those wondering what the difference is between a Retirement Annuity (RA) and a Pension Fund, Van Der Spek said: “An RA is taken out by an individual whereas a pension fund is provided by an employer and is tied to your employment status.”

The general rule of thumb for a comfortable retirement is 15%. “15% of your salary should be put aside for your entire working career of around 40 years. For those wanting to retire in luxury, 20%-plus is advised. Also, bear in mind that what R1 is worth now will differ by the time that you retire,”

Van Der Spek shares advice given by financial planners saying, “multiply your needs by 300. Simply put, if you currently live on R50,000 per month, multiply this by 300 to determine what you will need to maintain a luxury lifestyle post the age of 60.”

Van Der Spek’s comments dovetail retirement expert Andre Tuck, a senior Investment consultant at 10X Investments.

Tuck also mentions three old school ways to ‘guesstimate’ your retirement goal:

1: Multiply your final annual salary by 15

“Let’s say your take-home pay is R25,000 a month in your final year of working, giving you an annual salary of R300,000,” said Tuck. “To maintain your lifestyle after retirement, you’ll need around 15 times your annual salary, so 15 x R300,000, meaning a lump sum of roughly R4.5 million,” he said.

He added, however, that if you are hoping to do things you didn’t do during your working years, for example, travel, you should rather multiply your final salary by 17, or even 20.

2: Save R1-million for every R5,000 you want to draw down as a pension every month

You can also get a rough idea of how much money you’ll need to have saved at retirement by assuming that you will need R1 million invested in an annuity for every R5,000 you want to draw a month once you’re retired. So, if you want to draw a monthly pension of R25,000 a month, you will need to have squirrelled away R5 million by the time you retire.

3: Multiply your monthly needs by 300

One of the simplest calculations is to multiply what you think you’ll need per month (say R25,000) by 300 to determine the lump sum you will need to have saved (R7.5 million in our example). This option gives a slightly higher figure than the other two options, which is a good thing, says Tuck.

“The more money you have available to invest once you retire, the better your lifestyle will be and the more likely you will be to withstand the impact of unexpected events, such as the current pandemic,” he said.

“Besides, I have yet to hear someone say they are worried they will have too much money in retirement,” Tuck said.

Van Der Spek said that maintaining one’s lifestyle should be of the utmost importance in their golden years. “People are living longer, so your retirement savings should be underpinned by the quality of life that you want during retirement,”

Easy retirement tips for millennials

  1. Time to take the first step. “Whether you are 20 or 30, it’s time to start saving towards retirement. Whether you are saving 15 to 20% or whatever you can, it’s important that you start.”
  2. Seek help: “Work with a financial planner to do the math. They can map out the journey, analyse what is needed and will help you to determine the amount needed to retire in style. They will also help to select the best, interest-bearing retirement plan or pension fund on the market.”
  3. Do your research: “Some companies, particularly large corporates, do allocate portions of your total cost to company to salary towards a pension fund or retirement annuity. Find out from the HR team what this entails and stay informed by tracking its performance throughout.”
  4. Focus on the end goal: “On the days where you feel that retirement savings would be better spent on a holiday, take some time to visualise your retirement. This will help to keep you on track – think short-term sacrifices for long-term gain.”
  5. Increase your allocation: “As you receive salary increases at work, make sure to up your retirement savings accordingly. Even a little bit can go a long way,” he said.

Read: South Africa proposes a mandatory pension system – here’s how much it wants you to pay

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