Calculating for retirement

2014-01-26 14:00

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Michael writes:

At the age of 33, I have R1?million saved already. Will this be enough for ?retirement, given the growth over the next 30 years? How much do I need for retirement?

Boitumelo Mothoagae, financial adviser and head of customer retention at Liberty, replies:

The income that you receive when you retire should be about 70% of your last salary before you enter retirement. Alternatively, the lump sum that you have saved by the time you retire must be a minimum of 12 times your current annual salary.

For example, if your last salary before retirement was R30?000 a month, then your retirement income would ideally be R21?000 a month. Another way to look at it is that you would need to have saved a lump sum of R4.32?million.

These scenarios assume that you are free of debt at the time you retire and have few things to pay for.

The major factors that you must take into consideration to determine whether the amount you have saved is sufficient are:

»?Have you paid off your house, car, loans, credit and all other debt?

»?Have you paid off your children’s education costs?

»?What are your medical bills? Do you need chronic medication and do you have enough medical cover? Remember, it is likely to be more expensive as you age.

»?What kind of lifestyle do you want to lead? Do you want to travel, eat at expensive restaurants, live in a retirement village or in a smaller home?

»?Will your spouse help you with costs, or will you be the sole breadwinner?

»?How many dependants will you have?

If you still have to pay off debt or have dependants, you will need more money during your retirement.

You need to consult an accredited financial adviser who can help you do a complete financial-needs analysis. This will determine what your current and future financial needs are, as well as how much you need to be saving now to add to the R1?million that you have saved.

The financial adviser will also determine what income you will need to continue to live the lifestyle that you are leading when you retire so that you do not have to downgrade.

Having said that, legislatively you can retire at the age of 55, which is 22 years away for you. If you are planning to work for another 30 years, however, then that gives you more time to accumulate wealth for your retirement.

You can then afford to invest your savings into aggressive or moderately aggressive portfolios to maximise your returns.

Equities are great for a high yield if you invest in them for the long term.

However, when you get closer to retirement, you would have to reassess your investment portfolio and move into a more moderate portfolio.

This will protect you from the high losses that sometimes come with equity-laden portfolios.

It is better if the money is invested in a retirement benefit policy so that you do not have access to it until retirement. This could be a retirement annuity or a preservation fund, depending on where the money is invested now.

City Press adds:

Currently, R1?million provides an income that grows with inflation of about R65?000 a year so, if you have R5?million, you would have an income of R325?000 a year.

If you invested R1?million in a lower-risk investment (low equity balanced fund) and received a 3% above-inflation return (which stands at about 10% now), you would have R2.5?million in today’s value.

If you invested in a slightly more aggressive fund (high equity balanced fund) with 5% real return (about 12%), you would have R4.4?million.

If you invested in a pure equity fund with 6% to 7% real return (13%), you would have R6?million in today’s value when you retire.

So, as you can see, it has a lot to do with your investment choices.

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