How do you know you are saving enough for retirement?
If you want to retire at the age of 65 with about 60% of your pre-retirement income, for example, this is a rough rule of thumb on how much you should be saving:
- If you start saving at 20, you need to save about 15% of your income each month (about 14% for males and 16% for females);
- If you start saving at 30 and are male, you need to save 20% of your income each month; if female, you need to save 25%; and
- If you start saving at 40 and are male, you need to save 35% of your income each month; if female, you need to save 40%.
To illustrate the absolute amount on then needs to save, based on the rand value of retirement income required, we can use the example below:
To provide R25 000 a month (in today’s terms) from age 65, assuming inflation of 6% and an investment return of inflation plus 3% (after costs) until retirement and an income of 4.9% a year (based on Sanlam guidelines for investment-linked annuity for males):
- A 20-year-old needs to save around R5 800 a month, increasing annually with inflation;
- A 30-year-old needs to save around R8 750 a month, increasing annually with inflation; and
- A 40-year-old needs to save around R14 500 a month, increasing annually with inflation.
But as already stated, this is a rough guide, and these percentages are increasing over time as people live longer. The monthly saving that will allow you to meet your retirement objectives depends on when you plan to retire and how much income you want to earn at retirement. It also needs to consider any existing savings you have.
Achieving your retirement objectives is much easier if you start saving early. A long savings horizon gives you more time to benefit from the power of compound interest. The most powerful thing about compound interest is that it’s not about the amount you’re saving; it’s about the period of time you’re letting your money grow. As an early saver, compound interest could turn an average saver into a financially independent person in retirement.
How often should you revisit your retirement plan?
It is generally a good idea to review your retirement investment decisions once every year. If you’ve had life-changing events like a promotion, additions to your family, changes in your health status or anything else that might cause you to retire earlier or later than initially envisaged, consider having a conversation with your financial adviser to see how these events affect your retirement contributions.
The purpose of the annual reviews is to ensure that your retirement income keeps up with inflation. It is important to invest your retirement savings in funds that earn a decent investment return or you will need to save even more to meet your retirement objectives.
If you have already retired, revisiting your retirement plan regularly allows you to manage your retirement income so that it will last throughout your lifetime. You need to carefully consider the income you take from your retirement savings. Some retirement income options may provide a higher income at retirement, but if the income does not keep up with inflation, you will have problems meeting even your basic income needs 10 or 15 years into retirement.
Our experience shows that at least half the men retiring today at age 65 will live beyond 86, and at least half the women beyond 92, and these ages are rising every year. Your retirement income may therefore need to sustain you for a very long time.
Battle of the sexes
Women need to save more than men with the same planned retirement age and income requirement, because women are likely to live longer than men after retirement. The impact of longer life expectancy of women can be illustrated as follows: A 30-year-old woman who hasn’t started saving for retirement but plans to retire at 65 with a monthly gross income of R25 000 in today’s rand value will need to save R10 300 a month, increasing every year with inflation, compared to the R8 750 a month for a man. This is based on an income of 4.2% a year (based on Sanlam guidelines for investment-linked annuity for females) and the same inflation and investment assumptions as mentioned.
Danelle van Heerde is head of advice processes and tools at Sanlam Personal Finance.
This is part one of the cover story that originally appeared in the 10 November edition of finweek. Buy and download the magazine here.