As consumers, we are generally able to calculate the cost of things and experiences. School fees, holidays, dinner with the family or the opportunity to move to a new house. Yet, one of the most important calculations you will ever make, is often a lot vaguer? Do you know the cost of retirement? Or do you perhaps ignore it, blindly trusting that your retirement contributions will be enough? Assuming it will all work out and you will retire well?
The truth is, most South Africans do not retire well. While you can simply leave if a night out becomes too expensive. Or ditch the helicopter tour if the holiday is proving difficult to afford, you can’t simply walk out after the age of 65 and start again. Either you will have to work longer (if you are able to keep your business going or if your employer will have you in some capacity), or you will spend your golden years in a constant state of financial stress.
This may sound extreme, but it’s true. As it stands now, you only have three options to ensure you will have enough money when you retire: save more, work longer or accept a lower living standard during retirement. Put another way, what would you rather do:
- Put away more now and miss out on some opportunities?
- Continue to work into your 70s?
- Substantially lower your standard of living at retirement?
Of course, there is also the unknown to factor in: how long will you live for, and will it be with or without your spouse?
How long is a piece of string?
Floris Slabbert, Director at Ecsponent Financial Services says that calculating how much money you need for retirement is personal and not a one-size-fits-all exercise. “We cannot say you need R5-million at the age of 65. In the same way, we cannot say that if you save 12% of your gross income monthly, you will have enough to retire,” explains Slabbert.
“Every situation is unique. For instance, most broad calculations assume a person saves for the full 40 years of their working life – from 25 to 65. But this is hardly ever the case. When did you start saving? How old are you now? Have you cashed out your savings before? Will you have dependents after retirement? Will you be down-scaling your living arrangements? Will your debt be all paid up? These are some of the questions that must be answered and are unique to each individual. A good financial adviser will be able to show you exactly where you stand.”
Slabbert adds, however, that these broad calculations can help gauge whether you are on track to reach your ideal goals.
“Assuming you will work for 40 years, your salary increases by at least 7% per annum, and you are a man (who generally live shorter lives), you will need to save 15% of your salary to achieve a retirement income of 75% of your final salary. Again, let’s be clear, this is an estimate. It assumes several variables, including that you will earn an investment return of 3% above inflation over your working life. Now, let’s say you cash out your annuity after changing jobs to spend it on a holiday, or start saving later in life. In such cases, these generalised calculations are not ideal and you need expert help.
“If you start at 35, you will need to save roughly 24% of your gross income every month. A good financial advisor will tell you exactly what you should save to achieve the income you want at retirement.”
To hit a retirement pension of close to that 75% of your final salary, you need to have saved between 15 and 17 times your annual salary in the year you retire. “To make sure you stay on track with your retirement goals, a financial advisor will compare your savings at certain age milestones, and advise you to adjust accordingly,” said Slabbert.
Aim for the moving target
“Your goals in retirement become very important, as is planning for the unknown,” said Slabbert. “Will all your debt be paid off at retirement? What about your living arrangements? Do you need your 1500 square metre property? Will you travel abroad, particularly in the early years of retirement? Have you provided for big expenses like replacing a vehicle, renovating your home, and medical expenses not covered by your medical plan? Have you considered the cost of assisted living and frail care?”
Slabbert explains that by considering these potential curve balls, you can set up an emergency fund to cover the unexpected and plan for the bigger expenses. Once you have done that, you can work out, with the help of an accredited financial advisor, how you will reach these goals. These elements, together with your planned living expenses, will influence how much you contribute to your retirement savings today.
“There are rules in various employer and private retirement funds. Ask your adviser to guide you when changing contribution amounts and so forth. Your actions may have unintended consequences like extra costs, penalties and tax.
“Finally, it is important to remember that it is a moving target,” said Slabbert. “But it is a target nevertheless. Skilled advisors such as Ecsponent will be able to navigate whatever the inflation rate or economy throws at you over the long term.
“This is not one of those calculations you can afford to leave for another day. Retirement can be very long, many times as much – or even more – as a quarter of one’s life. That is a long time to have regrets and the best way to avoid those regrets is by taking your planning very seriously today,” said Slabbert.