When we look at our retirement funding as a lump sum it may seem like a lot of money – until you realise that it represents your entire future income.
If you retire at the age of 60 and you live until 80 – which is relatively young – you need enough to pay for 240 paycheques. If you received an income of R20 000 per month which grew at the rate of inflation, you would receive R4.8 million over that period.
To provide an illustration of how much a lump sum of R1 million on retirement can give you as an income, we assumed a male retiring at age 60 with a spouse who is four years younger than him.
The first example is a joint life annuity which means that his wife would continue to receive the income should he pass away first. For every R1 million of pension, he would receive an income of around R4 500 per month guaranteed for life, increasing by 5% a year. In order to have an income of R20 000 per month, he would have to have at least R4.5 million at retirement.
In the second example he uses a market-linked living annuity and draws down 6% of the capital each year, which is the maximum recommended drawdown. A fund value of R1 million would provide an income of R5 000 per month, so he would need a lump sum of R4 million on retirement to give him R20 000 per month. Depending on market returns his income should increase with inflation until the age of 82 when his capital starts to erode, which means his wife would also experience a reducing income if she outlives him.
You need to get good advice well ahead of retirement. Don’t just look at the fund value and believe that it will be enough.