Establishing whether or not you will have enough money to live off on the day you stop working is an intimidating exercise for many people. There are so many things to consider. How much will I need? How much should I put into a retirement fund each month?
According to the Private Pension Index released by BankservAfrica in January, the average take home pension in December 2014 was R5 722. The Index also revealed that more than 85% of pensioners receive less than R10 000 per month, much less than the average disposable income of R12 542 per month in the formal sector for November 2014. (To read an article on the Private Pension Index, click here.)
From the above it is evident that when people reach retirement, they may very well have less to live on than they do while they are working.
It is important to remember that the pension that you require will depend on a number of factors. These include your standard of living and lifestyle, as well as where you live, any dependants you may have, and any medical conditions you may suffer from.
The cost of living generally increases each year, so if you haven’t already done so, you may need to increase your monthly retirement fund contributions in line with inflation.
How much do you need to save?
Niel Fourie, public policy actuary at the Actuarial Society of South Africa highlights: “While consumers should always have their financial needs assessed by a qualified financial adviser when deciding on a savings and investment strategy, actuarial models show that a good rule of thumb is that 12 times your annual salary is likely to buy you a financially comfortable retirement. This is assuming that you are debt free by the time you retire.”
However, this figure is only to support an individual. If you are responsible for supporting a spouse in retirement as well, Fourie notes that this increases to a multiple of 15.
For example, if you take the monthly average salary according to the Private Pension Index of R12 542, that is an annual salary of R150 504. If that is your salary at the time of retirement, you would require approximately R1 806 048 in a retirement fund in order to have “a financially comfortable retirement,” or R2 257 560 if you are supporting your spouse as well.
Ensuring that you have enough
Fourie highlights that when starting to save towards your retirement it is important that you select an annuity that “will provide you with a pension that best suits your income needs at the best price level.”
He adds that some annuities, such as living annuities, pass the risk along to the customer, which make them cheaper than other annuities, such as compulsory annuities, which pass the risk on to the insurer. This risk includes longevity, inflation and investment risk.
According to Fourie, one of the most important aspects of making sure that you have enough for retirement is the age at which you start investment in a retirement fund.
“This is not only due to the simple reason that if one starts early, more contributions can be made, but also due to the power of compound interest. The sooner contributions begin, the sooner interest on the contributions is earned and therefore, the sooner interest on that interest is earned,” he notes.
Fourie believes that when you retire you can probably live comfortably on less than you were earning before you retired, as you receive tax benefits after you retire, and you no longer have to set money aside for savings. For example, you could probably live comfortably on a monthly income of 75% of your final salary before retirement.
If you are aiming for 75% of your salary and you start saving for your retirement at 25, you need to contribute 15% of your monthly salary to a retirement fund. However, if you only start contributing at 35 that would increase to 25% of your salary, and at 45 you would need to invest 47% of your salary a month to achieve the same level of savings as the person who started at 25 years of age.
Budgeting for retirement
It is important to budget separately for your retirement contributions. Fourie points out that paying off debt, such as your mortgage, would need to be done on top of making monthly contributions to your retirement fund.
“If you are not currently in a position to save the required amount, at least make a commitment to whittle down your debt faster. Once you have cleared your debts, take that money and start saving it,” he added.
Consumers often take into consideration the value of their house when they are calculating their long term savings. However, Fourie stresses that this is not a good approach to saving towards retirement.
“You are fooling yourself with this approach, because you will still need to stay somewhere once you have retired. Also, selling your home to rent exposes you to the fluctuations of rental levels.”
However, Fourie highlights that it is also best to consult with a professional financial advisor as savings contributions and retirement needs will differ per person. “We recommend you consult with a professional financial advisor to ensure you are on track for a financially secure retirement.”