Clifford, like many people nearing the age of 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 mortgage bond will be paid off in December and I won’t have any children to support,” says Clifford who currently earns R26 000 per 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, 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.
The catch however is that R12 500 in 2025 (when Clifford retires) 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 that his mortgage 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 mortgage 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’ll need in retirement
For example if your budget shows that you will need R20 000 a month to live on in retirement, then you would adjust your monthly income (based on the current inflation rate) as follows:
- 5 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 R6m
- 10 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 R8.1m
- 15 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 R10.8m by the time you retire
Strategies to boost your retirement income
It is most likely that R3 million will not be enough to provide Clifford with a sufficient income, 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 current retirement savings. Clifford would have to save an additional R13 000 per month for the remaining eleven years of his retirement in order to double his retirement lump sum from R3 million to R6 million. That would provide him with an income in today’s value of around R13 000.
Use tax benefits: Clifford should start by finding out if he can increase his contribution to his company’s retirement fund as these are tax-free contributions and also cost effective. Minnie recommends that Clifford starts investing in a retirement annuity. As Clifford is contributing to a company retirement fund he can only contribute tax-free up to 15% of his non-pensionable 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 which will come into effect on 1 March next year which will benefit Clifford, as the amount one can save tax free into a retirement fund will be increased to 27.5% of one’s total income to any retirement fund.
Retire later: By retiring five years later at the age of 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 as well as the continued contributions over this time. The later you retire the more income you receive from an annuity, as statistically you will be relying on that pension income for less time.
|Delay retirement (years)||Boost in income||Boost in income (adjusted for inflation)|
Consolidate: Currently Clifford’s investments are spread across various products. He is contributing to Satrix as well as a monthly contribution onto 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. 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 this would reduce his platform admin fees since there are now no external portfolios and he will get a full platform rebate, meaning that his returns will increase by 0.5% per year – that 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. Over the last ten years of his working life Clifford should not be tempted to use any salary increases to increase his lifestyle but to rather focus on paying off debts and boosting his retirement savings.