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How much should you save for retirement?

26 February 2014
2 minute read

Your guide to retirement savings

“Grow old along with me. The best is yet to be.” So said Robert Browning in 1864. 150 years later his words still ring true, yet for so many of us planning for our old age is often pushed to the bottom of a long list of financial priorities. If you want to take the first step towards a comfortable retirement you need to start planning sooner rather than later. In the first of our series on retirement planning we are going to help you answer the question “how much is enough?” 

If you want a rough estimate of the money you need in retirement you can use the following guideline. The monthly income that you receive when you retire should be about 70% of your last gross salary before retirement or the lump sum that you have saved at retirement must be a minimum of twelve times your current annual salary. If you target a pension that is the equivalent of 75 to 80% of your final salary before retirement, it is widely expected that you will be able to maintain your pre-retirement standard of living as well as afford your increased medical expenses in retirement.

However, using the formulas above will only provide you with a rough estimate and everyone has different needs. To ensure that you live comfortably in your retirement, some of the factors you need to consider include:

  • Longevity: people are living longer. Unfortunately, this means that you now need your retirement money to last between 20 to 30 years past your last working day. The alternative is to continue working in your old age. While this might be an attractive option for some, most people look forward to retiring and not needing to work.
  • Medical costs: as you get older, your medical expenses are likely to increase significantly. A number of companies have already started phasing out post-retirement medical aid benefits, which means you are more than likely going to have to fund these costs out of your own pocket.
  • Living expenses: Have a clear idea about how you want to live in retirement. Are you prepared to downgrade your lifestyle or do you want to maintain the same lifestyle you have now? Bear in mind that while the amount in your retirement fund might sound like a lot, inflation is going to eat into that money at a significant rate.
  • Family responsibilities: Are you still going to have dependants when you retire? Maybe you had children at a late stage in life – will they be independent and earning their own income or still reliant on you? Will you be the main breadwinner or will your spouse also have a retirement income from his or her own savings?
  • Debt: Ideally, you should enter retirement with no debt and try to keep it that way. If you are still going to be paying off a bond, you need to take this into account.

Saving for retirement may seem like a daunting prospect but like most things in life, if you tackle it one step at a time, you can conquer any challenge including building a nest egg for your old age!

In our next article on retirement planning we will talk about how you can go about saving the money you need to retire.

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