How much you should save to retire comfortably in South Africa
Having enough money when the world of work era draws to a close is a top concern for many South Africans – but navigating the long-winded journey to getting there is tough.
According to the Old Mutual Savings & Investment Monitor 2024, saving for a comfortable retirement is a top savings goal among working South Africans.
With that said, it notes that only one in every four working South Africans are very confident that they will have enough savings for their retirement – as most spend a considerable chunk of their salaries servicing debt and everyday essential expenses.
For those who do not use retirement annuities for retirement savings, a lack of understanding is cited as one of the key reasons, with many not sure where to even start.
How much do you ultimately need?
Upon retirement, individuals generally require less income than before, as certain expenses (e.g., commuting, mortgage payments, retirement contributions) will no longer apply.
Additionally, tax liabilities decrease after age 65, with further reductions after 75.
The precise savings required varies based on personal factors, such as current savings, desired retirement age, and expected retirement income needs.
However, experts from the 10X Investments Consultant Team describe three ‘rules of thumb’ for adequate retirement savings:
- Multiply your final annual salary by at least 15
If, for example, your take-home pay is R25,000 a month in your final year of working, that would mean an annual salary of R300,000.
To maintain your lifestyle after retirement, you would need at least 15 times your annual salary, so 15 x R300,000, which is a lump sum of roughly R4.5 million.
This is a general guideline, but you may need to save more if you plan to travel or pursue expensive hobbies in retirement.
- Save R1 million for every R5,000 you want to draw down as a pension every month:
The 10X Investments experts said that 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 per month you want to draw as income once you’re retired
This means that if you want to have a monthly pension of R25,000, you will need to have R5 million saved by the time you retire.
- Multiply your monthly needs by 300:
The experts said that this is a more conservative estimate, but a good starting point.
For example, if you think you will need R25,000 per month in retirement, you will need to have R7.5 million saved.
“This option gives a slightly higher figure than the other two options, which is a good thing,” said 10X Investments.
Other important tips
Experts say that a continued focus on savings, as difficult as it may prove, stands people in good stead.
Sanlam’s Farzana Botha and Sipho Mncwabe shared some useful “rules of thumb” to consider when thinking about retirement savings:
- Start saving as early as possible.
Even small amounts saved early on can grow significantly thanks to the beauty of compound interest.
If you start saving at age 25, you will need to save 15% of your income to replace 75% of your last income at age 65.
If you only start saving at 35 you will need to save 24% of your income. Delay until you are 50, and you will need to save a whopping 60% of your income.
“It has been said that the best time to plant a tree is 20 years ago, and the second best time is today. The same holds for retirement savings. Every month you lose is a month you will never get back,” said Mncwabe.
- Save as much as you can:
Even if you can’t save the full amount you need to reach your retirement goals, it’s better to save something than nothing.
“While we may not see or appreciate the impact of the small amounts, over many years they make a difference because of compounding interest,” said Mncwabe.
“So we should never underestimate the power of small beginnings,” he added.
- Don’t rely on someone else to provide for your retirement:
While an inheritance or support from family members can be helpful, there’s no guarantee that it will be available.
You are more likely to manage your money well if it is yours.
- Make sure your retirement savings plan accounts for healthcare expenses.
Healthcare costs can be significant in retirement, so it’s important to factor them into your savings plan.
- Preserve your savings:
Avoid cashing in your retirement savings early.
The new two-pot retirement system in South Africa makes it easier and tempting to access your savings in times of financial hardship, but Botha said that it’s important to remember that this money is meant for your retirement.
- Seek help from a financial advisor:
Although there are great tips, retirement saving is not a one-size fits all. A financial advisor can help you create a retirement savings plan that meets your needs.
Remember, these are all just rules of thumb.
The amount of money you need to save for retirement will depend on your individual circumstances, such as your desired lifestyle, health, and life expectancy.
Loading ...
