How much money do you need to retire?

By Isabelle Coetzee

The majority of South Africans are unprepared for retirement, with 21% admitting their plan is a bit vague and 41% saying they don’t have a plan at all.

This is according to the 10X South African Retirement Reality Report, which is based on 11.9 million economically active respondents who participated in the Brand Atlas survey.

The report also found that more than 53% of respondents had no idea how much money they could expect at retirement – never mind how much money they ought to have saved by then.

Justmoney takes a look at two different retirement formulas, known as the 4% rule and the rule of 300, to find out how much money South Africans will need at retirement and what they need to do once they have retired.

The rule of 300: Calculating how much you need to retire

According to Floris Slabbert, director at Ecsponent Financial Services, the rule of 300 can help you determine your target number at retirement age. 

Without a financial background, retirement planning will always be difficult because you need to guestimate your expenses years, or even decades from now. 

“In order to determine how much you will need to save for retirement, I always advise people to multiply their expected monthly spending by 300,” says Slabbert.

For example, if your average spending is R30,000 per month, you will have to save R9,000,000 for your retirement, plus the amount you will be taxed on your investments.

“By no means can the rule of 300 be used as the only way to determine your target number. But it’s a handy tool to get perspective into how you want to retire one day,” says Slabbert.

She adds that when you are 65 you will spend money on different things than what you do in your 20s – perhaps less on superficial stuff, and maybe more on medical aid.

This means you should consider which expenses you’d have then, as opposed to basing your calculation on the expenses you have now.

The 4% rule: Calculating how much you can spend during retirement

Slabbert believes the problem is not that people do not make provision, most do or at least they try to – the fact is just that most people “out-live” their retirement benefits.

And this is where the 4% rule comes in. It stipulates the amount you should withdraw at retirement to provide you with a steady income that’s adjusted for inflation.

Returning to the previous example, 4% of R9,000,000 is R360,000, which will provide you with the R30,000 per month you need to cover your expenses.

According to Shaun Duddy, product development manager at Allan Gray, the 4% rule dates back to 1994, when author William P. Bengen conducted extensive research on retirement.

He sought to identify a strategy that would allow his clients the best chance of enjoying a consistent, real income for at least 30 years after retiring at age 65. 

Using historical data from the 1920s on equities and bonds in the United States, he tested different withdrawal rates from retirements and asset allocations for every 30-year period.

From this, Bengen created a formula that would guarantee inflation-adjusted income for at least 30 years in nearly all circumstances. In summary, he recommended the following:

  • Withdrawing 4% of your capital, starting at the end of the first year of retirement (he used the end of the year for ease of calculation).
  • Increasing (or decreasing) the absolute cash value of your withdrawal only by inflation each year thereafter.
  • Maintaining at least a 50% allocation to growth assets such as equities.

“Our research shows that this method would, for the most part, hold true in the South African context,” says Duddy.

As an example, he explains that if you retire with R10 million, this approach recommends you should not withdraw more than R400 000 in your first year of retirement.

You should also increase this amount by no more than inflation in the years that follow, and you should have at least 50% in growth assets such as equities.

“History suggests that following such a strategy will give your money an excellent chance of lasting for at least 30 years,” says Duddy.

What are the current trends of retirees?

According to Duddy, not having saved enough for retirement will mean that your income might not be enough to maintain your pre-retirement spending and lifestyle.

“If this income gap needs to be filled, you may need to rely on family or friends to support you or you may need to find part-time work,” says Duddy.

Only 30% of people can retire these days. The majority cannot afford it. With the current economic crisis, people struggle to contribute to retirement benefits, says Slabbert.

She explains the reality the different generations find themselves in today, based on the economic and political environment during which they grew up: 

  • The Silent Generation (70 to 87-year-olds): They often accept that they could not make provision and will end up dependent on children, family, or in retirement homes with government grants.
  • The Baby Boomers (50 to 70-year-olds): They had a more informed and educated experience of retirement options. These will be the people who are traditionally invested in retirement annuities, with a little more diversification.
  • Generation-X (35 to 50-year-olds): They had much more choice, had wider diverse portfolios, often share portfolios and properties. This generation will be much more aware of opportunities in the market. This is also the age group that often sacrifice the initial tax and then re-invest for a better return. Much more on the ball to ask and do proper due diligence.

If you outlive your savings, you could get a government grant, but the income is dismal, and many retirees who are ill cannot make a living from it.

Millennials are the next generation, and their retirement reality will depend on what financial decisions they make while young.

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