How much do I need to retire?

2014-07-16 19:00

Retirement can be a financial strain. Make sure you are taken care of, writes Maya Fisher-French

As you approach retirement age, concerns about maintaining your lifestyle can be stressful. It is never too late to make sure your policies are in order and that you are going to be comfortable when you do stop work

Clifford, like many people nearing 50, is starting to worry about his retirement and whether or not his current savings will be enough to provide a decent income in retirement.

“I would like to live on R3?million in my retirement. My bond will be paid off in December and I won’t have any children to support,” says Clifford, who earns R26?000 a month after deductions.

While R3?million sounds like a lot of money, it doesn’t buy you that much income. According to Nico-Louis Minnie, the head of Wealth Management Platforms at Liberty, if Clifford has saved R3?million by the time he retires in 11 years, that would buy him an income of R12?500 a month, which would increase each year in line with inflation.

But the catch is that R12?500 in 2025 will only buy you the equivalent of what R6?500 would buy you today due to inflation. That means in order for Clifford to retire on R3?million, he would have to take a 75% cut in his current lifestyle.

If Clifford wanted to maintain his current income of R26?000 in retirement, he would need to have saved R12?million by the time he retires. That would buy him an income of R50?000 in 2025, which would be equivalent to an income of R26?000 today.

Clifford is in a fortunate position because his bond will be paid off before he retires and he will not be supporting any children, so his income needs will reduce.

“He won’t have this cost in retirement, but it is important that he does not buy a bigger house or take on a bond now,” says Minnie, who adds that the best way to calculate the minimum you will need in retirement is to work out a monthly budget, add inflation and then calculate the lump sum required for that.

Calculate the lump sum you will require in retirement

For example, if your budget shows you will need R20?000 a month to live on in retirement based on the current inflation rate, you would adjust your monthly income as follows:

.?Five years to retirement: increase your income needs

by 35%. That means you would need R27?000 to meet the same expenses as your current R20?000 budget. You would require a lump sum of R6?million.

.?Ten years to retirement: increase your income needs by 80%. You will need R36?000 to meet the same expenses as your current R20?000 budget. You would require a lump sum of R8.1?million.

.?Fifteen years to retirement: increase your income needs by 140%. You will need R48?000 to meet the same expenses

as your current R20?000 budget. You would require a lump sum of R10.8?million by the time you retire.

Strategies to boost your retirement income

It is likely R3?million will not be enough to provide Clifford with a sufficient income after he retires, so he needs to start making some decisions now about his retirement.

Increase savings: As Clifford will have paid off his mortgage by the end of this year, he could add this amount to his retirement savings. Clifford would have to save an additional R13?000 a month for the remaining 11 years of his retirement in order to double his retirement lump sum from R3?million to R6?million. That would provide him with a monthly income in today’s value of about R13?000.

Use tax benefits: Clifford should start by finding out if he can increase his contribution to his company’s retirement fund because these are tax-free contributions and this is also cost effective.

Minnie recommends that Clifford starts investing in a retirement annuity. Because Clifford is contributing to a company retirement fund, he can only contribute tax-free up to 15% of his nonpensionable income into a retirement annuity – a good way to do this is to invest 15% of his bonus each year into a retirement annuity.

There are retirement reforms about to be announced which will benefit Clifford, as the amount one can save tax free into a retirement fund will be increased to 27.5% of total income to any retirement fund.

Retire later: By retiring at 70 instead of at 65, Clifford could boost his retirement income by 28% after inflation. By not drawing on his lump sum, it will have an additional five years to grow. The later you retire, the more income you receive from an annuity because, statistically, you will be relying on that pension income for less time.

Consolidate: Clifford’s investments are spread across various products at the moment. He is contributing to Satrix and makes a monthly contribution into an Allan Gray investment platform, where his monthly contribution is spread across the Allan Gray Equity Fund, Stable Fund, Balanced Fund and Prudential Dividend Maximiser.

“Diversification is a way of managing risk, but spreading your portfolios too thinly can add to costs and lead to admin issues,” says Minnie, who adds Clifford would be better off investing in one standard balanced fund.

Minnie says if Clifford put all of his money in the Allan Gray Balanced Fund and left it on the Allan Gray investment platform, he would reduce his platform admin fees because there are now no external portfolios and he will get a full platform rebate, meaning his returns will increase by 0.5% a year, which will add an additional 5% to his retirement fund.

It is worth mentioning that the Allan Gray platform allows for a retirement annuity structure so if it made sense from a tax perspective, Clifford could invest monthly into a retirement annuity while remaining on the same investment platform.

Watch the lifestyle: The more expensive your lifestyle, the more money you will need in retirement. In the last 10 years of his working life, Clifford should not be tempted to spend any salary increases on his lifestyle, but to rather focus on paying off debts and boosting his retirement savings.

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