It’s no secret that most South Africans aren’t saving for retirement. Did you know that in South Africa only 6 percent of the population is able to retire comfortably at the age of 65. Are you wondering how much should you save for retirement? Let’s begin!
According to the South African Reserve Bank (SARB) the average South African spends 75% of his/her salary on servicing debt. This means that households spend three-quarters of their income pay on debt and only have a quarter of their salary to spend on everything else.
On top of that South Africa has a low savings rate, and is one of the lowest in developing economies.
Here are three ways to measure how much you will need to save for retirement:
Save R1-million for every R5 000 you want to draw down as a pension every month
You will get an idea of how much money you will need to save at retirement by assuming that you will need R1 million invested in annuity for every R5 000 you want to draw a month once you’re retired. So, if you want to draw a monthly pension of R15 000 a month, you will need to have invested R3 000 0000 by the time you retire.
Multiply your monthly needs by 300
Multiply what you think you’ll need per month (say R15 000) by 300 to determine the lump sum you will need to have invested (R4 500 000 in our example).
Times (Multiply) your final annual salary by 15
Let say your take-home salary is R15 000 a month in your final year of working, giving you an annual salary of R180 000. To maintain your lifestyle after retirement, you’ll need 15 times your annual salary, so 15 times R180 000, meaning you will need around R2 700 000 invested for retirement.
Out of the 3 options, the second option has a slightly higher figure than the other two options, which is a good thing. It might be closer to the amount you will need for retirement.
What percentage to save for retirement:
- 15% if you start when you are 25
- 245 if you start when you are 35
- 43% if you start when you are 45
- 60% if you start when you are 50
Aim to put away at least 17% of your paycheck from age 25.
Things to do to ensure you stay on track:
- Emergency Fund: Aim to maintain at least six months of your living expenses in emergency savings, in a high-yield savings account. keep your emergency fund topped up, especially if unexpected expenses have come along.
- Pension Fund: Make sure you’re enrolled in your employer retirement plan and contribute at least enough to get your full company match. If a company plan is unavailable or not great, choose either a retirement annuity or tax-free account.
- Additional Savings: Invest additional savings once you max out your contributions to individual and employer retirement plan.
- Retirement Savings: Review your contribution percentage annually, especially if your compensation has significantly increased. By the time you turn 50, aim to have six times your current annual salary in retirement savings.
Free Course: How To Build An Emergency Fund
Ask yourself these questions:
- What expenses may start or increases? This may include new hobbies, aspirations like travel, and healthcare costs.
- What would I no longer pay for when I retire? The things I don’t need or no longer have as expenses.
- What would I still pay for when I retire? The things I need to cover like living expenses and lifestyle aspirations.
The questions will give you an idea of what to take into consideration when you plan to retire.
Free Course: Investment Guide: What’s your ‘Why’ in Investing
Let compounding do the work
Time is your most powerful tool for retirement savings. Small amounts invested early in your career can grow substantially larger than even big amounts invested later in life.
Let’s face it, most South Africans can’t afford to set aside a full 15% of their salary for retirement. But don’t let that discourage you. Investing any amount for retirement positions you to benefit from compounding as soon as possible.
Consider two hypothetical investors
Tebogo start investing R1,000 a month at 25. By age 65, he would have a retirement balance greater than R5,000,000 assuming annual returns of 10%, which is the average return on the stock market.
Meanwhile, Palesa waited until 35 to start saving, but invested R2,000 a month. Palesa would have almost R1,400,000 less in her retirement balance by age 65, despite contributing almost R240,000 more.
The difference between Tebogo and Palesa shows the power of time and compounding when understanding investment returns earned by your investments.
More importantly, it also shows that you can still achieve very significant returns even if you can’t start investing quite as early in your life. In the second scenario, Palesa only contributed R720,000 of her own money, starting at age 35. From that, she earned almost R3,400,000 in investment returns.
As you start investing for retirement make sure you reduce your debt to the minimum. It will allow you contribute extra money towards your retirement savings. If you’re feeling behind in your savings, review your expenses and see where you can cut back or find ways to make an extra income.
Read: Debt counselling vs Debt consolidation
Don’t be afraid to ask for help. A financial advisor can help you review your investments (even if you haven’t started yet) and help draw up a map for long-term retirement savings success.
Feel free to enroll in one of our eight free courses.
