At a recent investor roadshow, Richard Carter, head of product development at Allan Gray, provided some figures to illustrate how much you should already have saved for retirement, based on your current age.
Carter worked on the assumption that to retire with 75% of your current salary in retirement, you need to have saved 17 times your salary by the age of 65. To be on track to reach that figure, after ten years of working, say around age 35, you should have saved twice your total annual salary. After 20 years of working, around the age of 45, you need to have five times your annual salary put away for retirement. For example, if by the age of 45 you are earning R400 000 a year, you should have R2 million in your retirement fund.
Most of the audience was over the age of 30, and as they did the mental arithmetic, it was clear that most of them fell well short of the required amount. I must confess that my own retirement savings are slightly lower than the five times after-tax salary I should have.
Important numbers to keep in mind
For those of you who have just recently started working, these are important numbers to keep in mind. The only way you are going to meet your required retirement target is to invest at least 15% of your income towards retirement and to never cash it in when changing jobs.
In fact, the main reason most 30-plus individuals find themselves under-funded for retirement is that they cashed in their retirement funds in their early 30s. Carter illustrated that over a 40-year working life, if you start your retirement savings ten years later, at the age of 35, your final lump sum in retirement will be half that of someone who started saving from the age of 25. That is not just because you had ten extra years of contributions, but because those ten years have had a longer time to benefit from compound growth.
But what about those who cashed in their retirement funds when they shouldn’t have? All is not lost, if you follow these tips:
- Start using salary increases to boost your retirement provision rather than your lifestyle. You can invest up to 27.5% of your salary tax-free.
- Adjust your lifestyle so that your living expenses are more manageable in retirement. If you only need to live off 50% of your current salary, then you could survive on a lower retirement lump sum. Keep in mind when doing these calculations that you need to double your current medical costs, as these rise significantly as we age.
- Think about ways to extend your working life. If you can earn an income until the age of 70, even if it is just enough to supplement your retirement income, you can make your retirement funds last longer.
- Ensure you invest in growth assets that deliver returns above inflation.
Target higher investment returns
This final point of growth assets is critical when it comes to having enough to retire on – your investment returns are as important as the rand amount you invest when it comes to achieving your final retirement goal.
In Carter’s example, if you took all your retirement contributions over 40 years and stuck them under your mattress, you would only have two years of your annual salary available at retirement.
If you invested the money in a money market account, you would have only six times your annual salary. The only way to achieve 17 times is through market growth, and this assumes an investment in a balanced fund with an average annual return 5 percentage points above inflation.
Unfortunately there is no easy answer to the retirement conundrum but the sooner we start to take action, the more comfortable our retirement years will be.
This article first appeared in City Press.
For more articles on this topic, visit the Retirement section of this website.