Spoiler alert – there are no hard and fast rules to help guarantee the ultimate in retirement comfort. But you can support this goal by being smart about your retirement roadmap: knowing how much you need to save, knowing that every percent counts and knowing that small sacrifices today mean massive returns once you leave the 9 – 5 rat race.
Save the right amount
Knowing how much you need to save for retirement is crucial. Earlier this year, Business Tech reported that 92% of South Africans don’t have adequate savings to see them through retirement. This staggering figure is based on the amount of South Africans who can replace 75% of their income at retirement. This percentage, called the income replacement ratio (IRR), is the ratio of the pension income you receive relative to your pre-retirement salary. The IRR isn’t set in stone, however most industry experts argue that it should be between 60% – 80% of your pensionable salary. Some experts argue that 90% should be your go-to IRR, considering the rise in medical costs synonymous with old age.
So how much do you need to save to enable a comfortable IRR? The industry suggests 15% of your income, but is it enough to reach your retirement goals?
Know how much you need in five steps
- Calculate your current monthly expenses.
- Subtract the expenses you know you won’t be paying in retirement – this can include the savings towards your retirement, bond repayments, school fees and insurance expenses that won’t be necessary once you’re retired, such as disability cover or life insurance. Be generous with your future medical aid and out-of-pocket expenses.
- Multiply this number by 12 to calculate your annual living expenses.
- Adjust your annual living expenses to include inflation.
- Multiply your annual living expenses (with inflation) with the number of years you will spend in retirement.*
The last step is trick and uncomfortable to think about as nobody knows when they’re going to kick the bucket. Doing a variety of calculations will give you a good idea how longevity can influence your retirement income. Knowing this now will give you time to work in extra buffers to ensure a stress-free retirement.
You can also use an online retirement calculator, like those on the 10X or Discovery websites. This results are based on a couple of assumptions, like the annuity you’ll be investing in and past performance. Be sure to consult a few of these, as their results tend to differ. Remember the fees associated with the provider’s RA product can have a huge impact over time.
Know what you’re in for
If you contribute to your employer’s retirement fund, run the numbers. Often companies use the lower end of the pensionable income rate to calculate the employee’s contribution to the retirement fund in order to offer a higher take-home pay. This gives you more money in your pocket today, but (much) less money during retirement.
Wait. What is pensionable income?
This is the income used by an employer to calculate your contribution towards a pension or provident fund. According to the Income Tax Act, pensionable income or pensionable salary should be between 60% – 100% of the employee’s total annual remuneration. You can contribute up to 27.5% of your gross monthly income to your RA. This amount gets deducted from your annual salary and moves you into a lower tax bracket, saving you money while you save money.
Bump it up
Increasing your monthly contribution with an extra 3% of your gross salary can result in 15% more income during retirement. If time is on your side, the smallest adjustment will definitely go the extra mile (and then some) once you’ve reached retirement.
*If this all seems like too much effort, multiply your current monthly expenses by 300 to reach a target amount that will allow a liveable 4% drawdown rate.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.
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