How Much money Is ‘Enough’ For You To Enjoy A “Decent Retirement”? Is It R1M, Or R2M, Or Even R5M?
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 R2m is enough for a decent retirement; but if you need R50,000 a month, then even R5m will be too little.
Having ‘enough’ means you can maintain the standard of living you are used to, for the rest of your life. You are then financially independent – you won’t have to rely on anyone else to support you.
In an ideal world, everyone would be financially independent when they retire. Sadly, only 10% of South Africans can look forward to a “decent retirement”. The other 90% are forced to lower their ‘lifestyle’ or seek help from family and friends to make ends meet. They face an undignified and uncertain old age. Remember, South Africa does not pay a state pension, merely an old age grant. At R1,410 per month, this does not go very far.
The need to save for retirement is greater than ever, because we now live longer, on average, than before, and we should expect to spend more time in retirement than our parents. What we should NOT expect is that someone else will look after us: the onus is on each and every one of us to take responsibility for our own retirement.
Your employer’s pension or provident fund is usually the cheapest, most tax efficient and the most disciplined way to save.
Know your savings goal – the amount of money you need, by the time you stop working. An online retirement calculator (such as the 10X Retirement Calculator) can help you. As a rough guide, you will need about ten times your current annual salary, to retire comfortably at age 65. So if you are earning R20,000 pm now, your retirement goal will be around R2,4m (in today’s money terms, ignoring inflation). This may seem like a big number, but you can get there, if you TAKE CONTROL and INFORM YOURSELF how you can get there.
For a starter, implement these 5 steps to retirement success:
1. Save enough!
Most people don’t save enough, to meet their retirement goal. You should save at least 15% of your income. If your life and disability cover is paid out of your (or your employer’s) contributions, then you must save more. If you think that is too much, look at the compulsory contributions to the Government Employee Pension Fund: 7.5% from the employee and another 13% from the employer.
2. Start saving early
Ideally, you should save your entire working life (40 years), starting with your first pay check. To reach your goal, you also need help from the investment return you earn on your contributions – interest, dividends and rising share prices. You also earn this return on the returns you have already earned. This is called ‘compounding’. The longer you save, the more your returns compound, and the more they make up of your pension. After ten years, returns represent around ONE THIRD of your contributions, but after 40 years, they will be more than DOUBLE your contributions. The longer you save, the more your money works for you, and the bigger your retirement income will be. See Fig 4.
3. Preserve your savings when you change jobs
Most employees cash in their retirement fund when they change jobs. Don’t do it! If you do not preserve, you not only give up your savings, but also the compound return you would earn on those savings, for the rest of your working life. It is almost impossible to reach your goal if you do not preserve.
4. Keep your fees low
Your investment return helps you meet your retirement goal, but investment-related fees reduce your return. Over 30 or 40 years, fees can take a big slice out of your savings – every 1% in fees you save will increase your retirement income by 30% after 40 years! So know the fees you pay, and never pay more than 1% pa. If you pay the average fee in South Africa (2% pa or more), it can ruin your retirement.
5. Invest for growth
To grow your wealth – and reach your retirement goal – you must earn a return higher than inflation. If you invest in cash, your return barely matches inflation. Your money grows, but not your wealth. Company shares, on the other hand, such as those listed on the Johannesburg Stock Exchange, deliver a return that is much higher than inflation – over the long term. As a long term investor (between 10 and 40 years) you should therefore choose a portfolio that invests mainly in shares.
Knowing these five simple success factors already puts you ahead of most other retirement savers in South Africa. Follow them, and you will be on the path to financial independence.