For a lot of people, hitting the big “four-oh” is the time when they realise that they should be saving for their retirement. Unfortunately for them, they’ve already missed out on 20-odd years of saving and earning compound interest, but with another 20 to 25 years to go, there’s still a lot that can be done.
We spoke to Ricky Rohrbeck, an independent financial adviser with Select Independent, about how to work out what to save for the future.
Work out what you need The first step, says Ricky, is working out how much income you’ll need every month when you retire. Start with your current monthly expenses and work out which are likely to fall away. Those that will fall away may include:
- School fees
- Bond repayments
- Life insurance, depending on your dependants and debts
- Your monthly retirement fund contribution
The remaining expenses will likely continue, and some items, like medical costs, will probably increase. You will also, in all likelihood, need to buy a car at some point in your retirement so don’t discount that expense entirely.
Once you’ve come to a monthly amount, multiply this by 12 (months) and again by the number of years you are likely to live after your retirement – 15 to 25 years is a fair range, so for the purposes of this calculation, we’ll go with the average of 20. This will give you a total sum to work towards.
Your monthly expenses (with school fees, bond and life insurance deducted) are currently R20 000. Multiplied by 12 and again by 20, this gives you a total of R4 800 000 to work towards.
R20 000 in 25 years’ time is going to buy you a lot less than it does today.
Work out how much you need to saveTo get to R4 800 000, you need to work out how much you need to save every month for the rest of your working life. If you are 40, you have 25 years with 12 paydays each of saving ahead of you. That’s 300 paydays, which means that, using our example, to get to R4 800 000 you need to save R16 000 a month.
What about inflation and investment growth? Of course, R20 000 in 25 years’ time is going to buy you a lot less than it does today, so you should also be worrying about inflation. Inflation is currently around 6%, but no one can really predict what it’s going to do next year, let alone 10 or 20 years into the future – other than saying with certainty that it’s not going to go away.
Ricky recommends that the way to account for inflation is simply to make sure that your monthly contribution to your retirement fund increases annually. It must increase at a rate of no less than 5%, and preferably at the same rate as your annual salary increase – so that your retirement fund also keeps pace with your lifestyle.
Then, remember that your retirement fund is an investment, so your capital should also grow every month. If you are still in your forties, you can afford to weather some market ups and downs, so you can still buy into a more aggressive fund. As you get closer to retirement, you will probably move your money into a more conservative fund. Either way, Ricky says you can probably expect returns of somewhere between 8% and 12% annually. This means that at the current rate of inflation, your investment will be growing at somewhere between 2% and 6% annually.
The fact that you are increasing your payments annually and that your capital is experiencing growth will mean that you will have a healthy buffer if the market dips, if you have any unexpected expenses after retirement or if you live longer than you estimated in your calculation.
The bottom line As you can see from the sums, the sooner you start investing in your retirement, the better. The longer you are invested, the more you benefit from compound growth. If the necessary contribution is too daunting for you to start making right away, start smaller, bearing in mind that you can adjust certain factors in the future – like delaying the start of your retirement or reducing monthly expenses. Don’t delay - start planning for your retirement, today!