How much do you need in order to retire comfortably? How long is a piece of string? The truth is that you cannot know definitively. However, what you should know is that you have to make a plan! Yes, that plan will be based on assumptions, however without a careful strategy for your retirement you can be assured of one assumption…and it isn’t a pretty picture.
Most people who are able to save don’t save enough because they don’t realise how much they are going to need for retirement. Part of the problem is that retirement planning is somewhat mystical and clouded with terminology like “annuities” and seemingly complex tax implications.
The reality is that all you have to do is save enough, during your working years, so as to have sufficient capital for investment so as to provide a return in income that will satisfy your monthly needs when no longer working. It really is that simple! Of a somewhat more complex nature is calculating how much capital you will need at some point in the future, based on certain assumptions, to provide said income.
The “how much is enough” question
If you retired today at the age of 65 and you had R1 million in retirement savings, you could buy an inflation-linked annuity (pension) of only R4 300 a month if you were a woman, or R5 100 a month if you were a man (hang on ladies, there is a reason you get less and it will be explained).
The first question you are likely to ask
when you are told that you need to save for retirement is “How much?”, and the Actuarial Society of South Africa has published some benchmarks against which you can measure your savings goals.
The Actuarial Society, has calculated what type of monthly income you could expect if you had R1 million, R5 million or R10 million to buy an inflation-linked guaranteed annuity. He also calculated how much you would have to save over 40 years to accumulate those amounts.
The “how does it work” question
With a guaranteed annuity, a life assurance company pays you an income for as long as you live. If your annuity is inflation linked, your income will increase every year in line with the inflation rate. Initially, your pension will be lower than a level annuity, which remains the same throughout your retirement.
A 65-year-old man who retires today could buy an inflation-linked guaranteed annuity of R5 176 a month with R1 mil-lion; R5 million would buy a monthly pension of R25 980; and R10 million would buy a pension of R51 986.
Women, on average, have a longer life expectancy than men, so a woman will
The monthly pensions are before tax. In the 2015/16 tax year, people over 65 have to earn a taxable income of more than R9 567 a month (or R114 800 a year) before they pay tax.
The “how much a month” question
The Actuarial Society also calculated how much money you would have to put away each month for 40 years to save R1 mil-lion, R5 million or R10 million. The calculation is based on the assumptions that each year, you increase your monthly contribution in line with an annual salary increase of seven percent; the inflation rate is six percent a year; and you earn a net return of 10 percent a year.
In order to have accumulated R1 million by today, you would have had to put away R800 a month to start with (increasing at seven percent a year) for 40 years, R4 000 a month for R5 million and R8 000 for R10 million.
The “what if it’s too late” question
Pensioners who realise that they have not accumulated enough money to buy a guaranteed annuity that will be able to meet their monthly income requirements often opt for a living annuity, because it enables them to draw a higher monthly income. However, this will rapidly erode an already low capital base, and the money,
With living annuities, also called investment-linked living annuities, you choose the investments – usually unit trust funds – and carry the risk that your investments fail to generate sufficient income to last throughout your retirement, which could be as long as 30 years.
With a living annuity, neither your income nor the preservation of your capital is guaranteed.
The Actuarial Society says that if you opt for a living annuity, to sustain your in-come you should not withdraw more than five percent of your capital a year. This means that, if you need R25 000 a month (or R300 000 a year) from your annuity, you will need a lump sum of at least R6 million.
The answer
Retirement planning is not a definite science. Anything based on assumptions about the future will not, and cannot be, exact. However, the old saying that if you fail to plan, you plan to fail could not be more true when it comes to planning for your golden years. Sitting down with a Financial Advisor, armed with all the tools and expertise to make those assumptions, do the calculations and advise you on a way to achieve your goals will be a valuable investment of your time.
Ready, steady, go…