How much is enough? How much must I save now to achieve this unknown amount by some indeterminate point in the future?<\/p>\n
Both are million-dollar questions, says Michael Rossouw, senior investment consultant at 10X Investments.<\/p>\n
In rand terms, there is no one correct answer, because we all have different incomes and lifestyles. If you can live comfortably on R10,000 a month, then R2 million is enough for a decent retirement; but if you need R50,000 a month, then even R5 million will be too little.<\/p>\n
Having \u2018enough\u2019 means you can maintain the standard of living you are used to for the rest of your life.<\/p>\n
There are so many unknown variables in this equation \u2013 your retirement age, your lifestyle at retirement, future inflation \u2013 that it may seem impossible to solve.<\/p>\n
Not knowing what investment returns you are likely to earn also puts a huge question mark on how much you need to save every month, to make the whole thing balance.<\/p>\n
Fortunately, it\u2019s much less complicated than it sounds.<\/p>\n
First off, don\u2019t set your savings goal as a lump sum amount \u2013 such as R5 million – but in terms of the monthly income you need in retirement. This can then be worked back to the size of the retirement pot you need.<\/p>\n
Secondly, ignore inflation for this calculation. You may think now that R5 million is plenty for a comfortable retirement, but you probably won\u2019t think so in 30 years.<\/p>\n
If inflation averaged 5% over time, then R5 million in 2050 would be worth only R1.16 million today. A R16 loaf of bread would cost you R70 by then.<\/p>\n
No one knows what future inflation will be, but whatever it is, it will also manifest in your salary growth and investment returns.<\/p>\n
As both your savings and your future expenses are subject to the same inflation, you can ignore this issue here.<\/p>\n
This way, you can relate your retirement income needs to your current income (lifestyle), and work with real (after-inflation) investment returns.<\/p>\n
Unlike nominal investment returns, the range of real returns for different asset classes is quite narrow over the long-term, so it becomes possible to calculate how much you should save every month, based on your particular circumstances, to reach your goal.<\/p>\n