Nearly three-quarters of South Africans worry that they will not have enough money to live on after they retire. Our stuttering economy and terrible national savings culture aside, one of the main reasons many of us are doomed is that we don’t know how to work out what we will need and where to start.
Fortunately, there are formulas and calculators to guide us on how much to save during our working lives to ensure comfort in our retired ones, according to Andre Tuck, Senior Investment Consultant at 10X Investments.
He said that online calculators will provide consumers with a detailed plan of how much to save each month to get there, as well as how much you will be able to draw down as your monthly income once you have retired.
“The rule of thumb is to save a minimum of 15% of your monthly income for your whole working life (average: 40 years),” said Tuck. “Invest your savings sensibly and this formula should give you a suitable lump sum at retirement age to give you a level of income that allows you to maintain the lifestyle you had prior to retiring.”
Saving for your whole working life, that is, starting early, will mean you benefit from compound interest, said Tuck. “You will be earning interest this year on the interest you’ve already earned last year and so on, piling growth on growth, in a virtuous cycle that will help you build a lump sum bigger than you might have been able to imagine.”
A key aspect of investing sensibly, according to Tuck, is to make sure you are not paying away a large portion of your growth in fees. High fees have the opposite effect of compound growth, creating an expanding black hole in your savings over time.
Tuck added that the best way to grow your money over time is to invest it in a well-diversified index-tracking fund. Index-tracking (buying a slice of the market rather than an actively-selected portfolio of individual stocks) will keep your costs down as well as giving you a much better chance of success and dramatically reduce volatility and risk.
So how much must you accumulate by retirement?
The best place to start is with an online retirement savings calculator. Insert some basic information, and the calculator will crunch the numbers for you and build a retirement savings plan for you.
The plan will include a lump sum goal as well as how much you need to save each month to reach that goal. By tweaking inputs on the calculator – such as how much you save each month, or the age at which you plan to retire, or even your appetite for risk – you can adjust the plan until you are satisfied you have something suitable and workable.
“Once you have your own, unique retirement savings plan, you will be in a much better position to get started and to stick with it,” said Tuck. “10X clients have access to this plan all the time and can always log on to My10X, the client portal, to see how they are tracking towards it.”
Tuck also mentions three old school ways to ‘guesstimate’ your 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
This is one of the simplest calculations: 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, says Tuck, is a good thing.
“The more money you have available to invest once you reach retirement, 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.