While the best course of action is starting as early as possible and saving for as long as possible, there are still options available to you if you find your retirement is suddenly around the corner and you realise you haven’t saved enough.
According to head of sales at PSG Wealth, Jac de Wet, it is never too late to play retirement catch-up, “however, you need to be realistic and understand the trade-offs you need to make,” he said.
“Investors often think retiring comfortably is only about the amount of money invested. However, the period of investment is even more important. Saving for retirement can be summarised as easily as this: The earlier you start, the less you need to save each month.
“The catch is just as easy: it’s not only about catching up on the amount of savings you have missed out on contributing (a challenge in itself). It’s really about catching up on the compounded returns you have missed out on.”
Retire with R1 million
De Wet provided an example of how much you would need to save each month to retire with an extra R1 million.
“The table below shows that if you want to retire with an extra R1 million at age 65 and you start saving at age 25, you’ll need to save R180 per month,” he said.
“If you want to end up with R1 million at age 65 but only start saving at age 45, however, you will need to put away a far greater amount – almost R1,400 per month.
“The longer you postpone saving, the more you need to save.”
While the above table provides a good outline of the different saving habits you will need for retirement in South Africa, realistically most middle-class South Africans will need more than R1 million to retire at 65 if they wish to keep up the same standard of living.
R1 million rand equates to an extra R4,100 to your monthly income (assuming a withdrawal rate of 5% from a living annuity).
“If you ask any retiree, they’ll tell you that will make a vast difference to your standard of living,” de Wet said. “Keep in mind that the current old age pension grant in South Africa is only R1,700 a month.”
He added that the general ‘rule of thumb’ is that your monthly income during retirement should be at least 75% of your last monthly pay cheque to be able to retire comfortably.
This is assuming that you won’t have large outstanding debts such as still paying off a car or house. This in turn implies that you will have fewer expenses and more disposable income.
However, de Wet said it is best to make provision to live much longer than we may typically expect due to medical advancements and the associated costs, which could mean that a 90% ‘replacement ratio’ (instead of the commonly accepted 75%) may be more reliable for planning purposes.
If you were to retire at age 65 with a monthly income of R50,000 (R600,000 per year) you will need 90% of that (which would be R45,000 per month or R540,000 per annum).
“Every year after retirement, this required amount will increase by roughly 6% (catering for inflation) and your retirement capital grows by 9%. Assuming you live until age 100, this means you will need to have saved more than R12.2 million by the time you retire,” he said.