Retire: Know your number

Carina JoosteLatest, Retire

Two questions that plague (or should plague) those of us who don’t have family fortunes waiting in the wings are, without a doubt:

  • How much do I need to retire?
  • How do I know I’m on track with my retirement savings?

We’ve attempted to answer these mystifying questions in a previous blog post, but it’s a talking point that should be revisited regularly as learning about personal finances is a lifelong journey.*

Several calculations can be used to determine the amount you would need to enjoy a comfortable retirement. And “comfortable” in this context is being able to receive an income from your pension that’s between 60% – 90% of your pre-retirement income. This is called the income replacement ratio (IRR), and it’s the ratio of your pension income to your pre-retirement salary. An IRR of 75% is often cited as the ratio we should all aspire to.

To calculate if you’re on track, your retirement savings should be close to 20 times your final annual income (pre-tax). According to the experts, this will provide an IRR of 70%.

If you’re close to retirement, it’s a simple calculation to give you a pretty clear idea of your replacement income. For those of us who still have a good 30 years to go before retirement, the mere thought of attempting this calculation feels like a rabbit hole of inflation calculations, ballpark figures and crystal ball speculations.

Enter the rule of 300. We briefly introduced the rule of 300 at the end of this blog and showed the cogs and wheels behind the numbers in this Wealthy Maths blog.

The rule of 300 is genius because it does all the number-crunching for you. To work out how much you need to retire well, simply multiply your current monthly cost of living by 300. Remember to remove the bigger expenses your future self won’t have from your monthly expenses to set a more realistic scenario. These big-ticket items can include your bond repayments and the kids’ tuition fees, as well as your retirement savings.

Now that you have your number, how do you know you’re on track? Consult with your RA provider or pension fund administrator for better insight into the projected future value of your investments. Numerous online calculators also offer a good indication of the future value of your savings.

The amount we need to save for retirement every month has, more often than not, been dictated by conventional wisdom, our parents’ beliefs and industry recommendations. Some preach 10% from day one until you reach retirement and others dictate that you need to stash 15% away the moment you get your first salary. But life, unfortunately, is not that simple. Because our circumstances and savings goals are as unique as we are, it’s our responsibility to know our number and work towards achieving it.  

*Bring snacks.

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.

Retire blog

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