How much money you need to retire comfortably in South Africa

Many South Africans have had to dip into their retirement savings to remain afloat amid the fallout from the Covid-19 pandemic.

Consumers now find themselves facing a pressing need to replenish their savings, and the big question that always comes up is – how much do I need to save to retire in relative comfort?

Schalk Louw, portfolio manager at PSG Wealth, provided an overview of retirement planning and what it takes to retire comfortably in South Africa right now.

Expected monthly income

Many experts recommend using the 80% rule 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 basis to start from,” said Louw.

“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, possibly having to move into a retirement home with assisted living facilities 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 to maintain your current living standard.”

Safe withdrawal rate

Unlike food products, human beings don’t have a “use by” date, so we have to rely on a safe withdrawal rate to ensure that we do not outlive our savings, said Louw.

According to this rate, you should be able to withdraw 5% of your portfolio yearly without having to use any of your remaining capital, he said.

“This approach is based on the fact that the historical return on the South African stock market (since 1964) was about 8% higher than the local inflation rate and that you would expect to earn slightly less than that in a typical balanced fund portfolio.

“By limiting your withdrawals to 5% of your portfolio, you should still have an additional 5% to 6% growth to cover inflation in the long run.”

Based on a 5% annual withdrawal rate after retirement, Louw said that the amount you will need to save in rand terms would look something like this:

R12,000 x 12 months = R144,000 (annual income) ÷ 0.05 (5% safe withdrawal rate) = R2,880,000.

Inflation factor

One of the biggest variables that may affect your retirement planning is inflation.

If you don’t properly compensate for inflation in your portfolio, you may fall short of your required total after retirement, said Louw.

Unfortunately, inflation is also one of the most difficult variables to consider, 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 R2,880,000 to retire in today’s rand terms, you will actually need around R12,360,588 when you retire in 25 years when you take inflation into account.”

Louw said this figure might seem high but noted you will be one step ahead because you can now determine how much you will have to save monthly to reach this target.

He added that you have a good head start if you are already saving towards your retirement by contributing the maximum towards a retirement annuity or pension fund.

“It is an absolute fact that very few people can survive on the current government old-age pension grant of a maximum of R1,890 per month – or R1 910 for people older than 75 years – as their only source of income after retirement.

“If you’re not making sufficient contributions towards your retirement using something like an employer pension fund or a retirement annuity, you will have to start or increase your contributions now to avoid paying for your mistakes after retirement.”

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