How much money you need to have saved for retirement based on your age

Historically, South Africans have been poor savers. However, the onset of the pandemic, coupled with a historical economic downturn has placed the importance of saving under the spotlight. And for some South Africans, this reality hit home, says Nirdev Desai, head of sales at PSG Wealth.

Desai said that many people may find the prospect of saving to be overwhelming, but small actions taken in the present can catalyse big changes in the future. Understanding and appreciating this principle is the key to developing better saving habits.

PSG Wealth pointed to three roadblocks that need to be navigated around on the road to better saving habits, one of which is not making use of one of the most effective savings tools available to South Africans: tax-efficient savings. Ahead of the approaching tax year-end in February, it may be useful for South Africans to bear the following savings roadblocks in mind:

RISC and its implications for life after retirement

At 12%, South Africa has one of the lowest gross replacement rates in the world. This rate refers to the percentage of an individual’s annual income during employment that is replaced by retirement income when they retire. The global gross replacement rate is 70%.

In a practical sense, this means that on average, an individual who makes a monthly income of R30,000 before retirement will only be able to withdraw R3,600 a month upon retirement.

Statistics also show that less than 10% of South Africans have made provision to retire comfortably by the age of 65, meaning that they will have to work longer or save more aggressively in order to stay afloat during their retirement years.

RISC is one of the realities of a world in which life expectancy is increasing and people live much longer than the pension system can cater for.

To frame your retirement provision capital requirement at 65, can use the 4% rule – for example, if your required monthly income is R30,000, then an annual drawdown of 4% dictates a minimum lump sum of R9 million, for a sustainable inflation-maintaining income through retirement.

Inflation – a savings roadblock that’s important to factor in

The cost of living in a few decades’ time will be much more than what it costs to sustain a comfortable lifestyle today. The effect of inflation on your savings should not be underestimated and needs to be factored in.

“Inflation is insidious, occurring in increments over time without really being noticed by the general populace. But a snapshot of what things cost just over a decade ago provides a telling picture,” said PSG Wealth.

According to a retail report by Broll, a loaf of white bread cost R5.89 in 2008. Today, it costs around R15.81. This amounts to an increase of 168%. Likewise, compounded by both the effects of inflation and the hikes in ‘sin tax,’ a box of cigarettes costs three times more than it did in 2008.

Fear and greed are savings stumbling blocks

‘Fear and greed’ are terms that you may hear financial advisers use frequently, said PSG Wealth.

“In a very loose sense, these emotions are two of the most prominent drivers of financial behaviour that affect how people spend and save money. From a broader perspective, these two emotions play a significant and often irrational role in how financial markets perform around the world.”

In an initiative that is designed to improve and encourage better savings behaviour, the South African government has created Tax-Free Savings Accounts which enable individuals to save a limited amount of money with no tax obligation.

There are stipulated caps on the total contributions that can be made into tax-free savings account. Currently, South Africans can invest up to a maximum of R500,000 per lifetime, with the balance of the account being able to exceed that amount due to the accrual of interest, the financial services firm said.

So how much should you have saved?

T. Rowe Price, a global investment management firm, said that savings benchmarks based on age and salary can serve as a helpful way to track progress against saving for retirement. It said that saving 15% of income per year (including any employer contributions) is an appropriate savings level for many people.

“Having one to one-and-a-half times your income saved for retirement by age 35 is an attainable target for someone who starts saving at age 25. We estimated that most people looking to retire around age 65 should aim for assets totalling between seven-and-a-half and 14 times their pre-retirement gross income,” T. Rowe Price said.

Assumptions: Household income grows at 5% until age 45 and 3% (the assumed inflation rate) thereafter. Investment returns before retirement are 7% before taxes, and savings grow tax-deferred. The person retires at age 65 and begins withdrawing 4% of assets (a rate intended to support steady inflation-adjusted spending over a 30-year retirement).

Experian, a consumer credit reporting company said breaking down your savings goals by age can help your total retirement savings goal feel more manageable. It can also help you identify whether or not you’re on track so you can rebalance short-term and long-term saving and spending priorities if necessary.

Experian also outlined how much money you should have saved for retirement at age 30, 40, 50, 60, and 67 – the age at which you can currently start collecting full retirement benefits.

Experts have various approaches to the common question of how much to save for retirement in total. Investment firm Fidelity recommends saving enough to cover 45% of your gross preretirement income per year, since the rest of your income in retirement will likely come from Social Security, said Experian.

“It’s also often difficult to plan using raw numbers, since your income and standard of living may fluctuate over your lifetime. Fidelity has created savings guidelines that track your income, rather than a total savings goal, so that you can identify retirement readiness decade by decade,” it said.

Here are Fidelity’s recommendations:

• By age 30: Have the equivalent of your current annual salary saved. If you earn $50,000, you should have $50,000 saved for retirement at this age.
• By age 40: Have three times your annual salary saved. If you earn $50,000, you should plan to have $150,000 saved for retirement by 40.
• By age 50: Have six times your annual salary saved.
• By age 60: Have eight times your annual salary saved.
• By age 67: Have 10 times your annual salary saved.

Read: Here’s how much money South Africans are saving for retirement