This is how much you’ll need to start saving if you plan to keep the same lifestyle when you retire

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For many young people the idea of saving for retirement seems like something that needs to be done only when one is much older, more settled, or has paid off debts. But this is courting disaster.
For many young people the idea of saving for retirement seems like something that needs to be done only when one is much older, more settled, or has paid off debts. But this is courting disaster.
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It's a familiar, sad story.

Life is good, balloon car payments mean upgrading that whip every four to five years, and extending your home loan repayment term means comfortably having a little extra cash for entertainment, pampering and new clothes every month.

Then retirement beckons, with some pressurised employers compelling workers to take early retirement. And, suddenly, reality hits. After settling debts, there is very little left to live on each month and the years left to live with no job prospects seem endless.

Retirement planning is easy to put off because many of us do not like to think of getting older and no longer being able to work. But the truth is every little cent you put away towards your golden years makes a huge difference in the long term.

Say you want to have a lump sum of R6 million at retirement, says Ester Ochse, Product Head: FNB Money Management. That should give you a sustainable income of R25 000 per month (increasing with inflation) until the age of 90.

If you are earning about that much now, that would mean having to do a lifestyle downgrade, depending on your age and your financial commitments, so R25 000 is a fairly conservative amount.

Ester provides the following estimation of how much you'd need to start saving to reach that lump sum of R6 million.

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Read more | 4 reasons cashing out your retirement fund when you change jobs is a bad idea

The invested amount versus the amount of total retirement savings that is made up of the investment return is also worth considering, with an investment of just under R900 000 at the age of 20 possibly being worth five times that amount at the age of 60, while an invested amount of just under R4 million at the age of 50 could potentially earn you only half of that in 10 years.

"The moral here is that the earlier a person starts saving for retirement, the more they can benefit on the effects of compound interest," says Ester.

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"So, when one looks at the illustration below one can see that to get to the same lump sum at retirement being R6,000,000 until the age of 40 most of the amount is made up of interest and returns in the investment. At about 45, the returns and contributions start equalling and after that it is the contributions that exceed the returns."   

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Even if you are struggling under a heavy load of debt, it's better to save a little bit rather than nothing.

"For many young people the idea of saving for retirement seems like something that needs to be done only when one is much older, more settled, or has paid off debts. But then we hear the scary statistic highlighting that only 6% of South Africans can afford to retire financially independent. That is a truly worrying statistic and something that needs to be changed for the better over time," says Ester.

She defines being financially free in your retirement years in the following terms:

"Financial independence is defined as not needing financial support from family, friends or the government."

These are Ester's five tips for making retirement the golden years you hope for money-wise.

1) Set your retirement goals and work out how much you need for those goals

"For example, someone that wants to regularly travel in retirement will need more in retirement than someone that wants to be a homebody." 

2) Continue to budget in retirement 

"Critically, look at your budget now and see how many of those expenses will carry on into retirement. For example, groceries will continue into retirement but traveling to work and back will not." 

3) Make provision for increased medical cover and expenses in retirement

"Getting older generally means more medical expenses, ensure that you work that into the budget. Medical inflation is notoriously higher compared to consumer price inflation; therefore, you need to take this into account." 

4) Make sure that you invest in the right solution for the right time horizon

"Solutions you invest in need to be appropriate for your needs. Some solutions protect you against the risk of outliving your pension and other solutions don’t give you protection against longevity risk but provide you with flexibility on the income that you select annually.

Read more | Your five-year plan: how to plan your retirement effectively

"Do your research and get advice from appropriately qualified and registered financial service providers."  

5) Preserve your retirement savings

When you change an employer and have a pension fund from the previous employer, preserve your retirement savings in one of the vehicles that are available like a preservation fund or the new employers pension fund.

The reason why most people do not retire comfortably is because they do not preserve their pension when changing jobs. This will help towards the effect of compound interest and is a good practice in the long run. 

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