Swan song
Retirement looks different for everyone. But whether you plan to spend your golden years jet setting around the world, playing on the beach with your grandchildren or tending to your garden, one thing is true: It’s going to cost you.
Just how much it will cost you isn’t quite as clear. Calculating how much you will need in retirement capital is much like measuring the length of a ball of string…difficult but not impossible. Fortunately, expert financial advisors come armed with high tech software resources capable of performing a financial needs analysis of your specific monetary present and future. In reality, the rand amount that you’ll need in retirement will come down to your specific lifestyle, how long your retirement will be, how much you’ve saved over the years and what other funds are available to you. Doing the math while you’re still working will mean less of a headache down the road.
Realising in retirement that you may not have enough will require more substantial changes to how you may need to live and what you can spend on. It is easier to make changes while you are still earning income. So, take out your pen and paper (or more likely, the calculator on your phone) and answer the following questions to map out how much money you need saved for retirement.
1. How much will you spend in retirement?
Realising in retirement that you may not have enough will require more substantial changes to how you may need to live and what you can spend on. It is easier to make changes while you are still earning income. So, take out your pen and paper (or more likely, the calculator on your phone) and answer the following questions to map out how much money you need saved for retirement.
1. How much will you spend in retirement?
The financial planning industry has come up with a general rule of thumb for how much you’re likely to spend in retirement: 80% of your pre-retirement income. The thinking is that in your later years, some costs — like commuting, schooling, bond payments, retirement contributions — are expected to go away. However, you probably want to give yourself a buffer. Sure, you may not be covering costs like petrol for your drive to and from work, but you’re probably also adding new retirement expenses, like a house repair you’ve been putting off or increased medical costs tied to aging.
The trick is to look at your current lifestyle and how much it costs, and then ask yourself what is going to change. It works best if you’re very detailed in this exercise; you may think you have a good idea of how much of your income every month goes to necessities vs. discretionary spending, but you may be surprised if you spend a few months actually tracking your spending. Don’t forget about inflation. The average South African inflation rate over the past 10 years has been 5% however, some costs, like health care, are expected to rise even faster.
The trick is to look at your current lifestyle and how much it costs, and then ask yourself what is going to change. It works best if you’re very detailed in this exercise; you may think you have a good idea of how much of your income every month goes to necessities vs. discretionary spending, but you may be surprised if you spend a few months actually tracking your spending. Don’t forget about inflation. The average South African inflation rate over the past 10 years has been 5% however, some costs, like health care, are expected to rise even faster.
Life is unpredictable, and it’s impossible to know exactly how much you’ll spend in retirement. But calculating how much you spend on a regular basis now and adjusting that for a changing lifestyle and inflation is the first step in determining how much money you’ll need once you ditch your nine-to-five.
2. How long will your retirement be?
This question may be even more tricky than calculating how much you’ll spend in retirement, since no one knows how long they’ll live. But we can take an educated guess.
The median retirement age is age 62, according to the most recent Retirement Confidence Survey conducted each year by the Employee Benefit Research Institute. While that might sound like it’s on the early end — since the traditional retirement age is 65 — it does signal that you may need to prepare for a longer retirement than you expect. With the overall SA life expectancy at 66.14 years as of 2023, according to Statista. However, bear in mind that this is the overall figure across all socio economic groups and it would make sense to factor in a retirement of at least 10 to 20 years for higher socio economic groups.
For some people, though, planning for 20 years won’t be enough. While the average life expectancy in SA is in the high 60’s, the share of South Africans who are living much longer is also growing. The number of South Africans living until late 80’s, for example, is expected to triple over the next three decades, according to Stats SA.
You should try to build a more individualized life expectancy estimate by considering factors like your family health history and gender, as well as your behaviours around smoking, diet and exercise. Women live much longer than men traditionally. And there is a long line of research linking physical activity to longevity. A study published in the American Heart Association’s journal in 2022, for instance, found that exercising five to 10 hours a week was associated with a 26% to 31% lower risk of death from any cause than not exercising at all.
3. What will your sources of income be?
When you no longer get an annual salary,
2. How long will your retirement be?
This question may be even more tricky than calculating how much you’ll spend in retirement, since no one knows how long they’ll live. But we can take an educated guess.
The median retirement age is age 62, according to the most recent Retirement Confidence Survey conducted each year by the Employee Benefit Research Institute. While that might sound like it’s on the early end — since the traditional retirement age is 65 — it does signal that you may need to prepare for a longer retirement than you expect. With the overall SA life expectancy at 66.14 years as of 2023, according to Statista. However, bear in mind that this is the overall figure across all socio economic groups and it would make sense to factor in a retirement of at least 10 to 20 years for higher socio economic groups.
For some people, though, planning for 20 years won’t be enough. While the average life expectancy in SA is in the high 60’s, the share of South Africans who are living much longer is also growing. The number of South Africans living until late 80’s, for example, is expected to triple over the next three decades, according to Stats SA.
You should try to build a more individualized life expectancy estimate by considering factors like your family health history and gender, as well as your behaviours around smoking, diet and exercise. Women live much longer than men traditionally. And there is a long line of research linking physical activity to longevity. A study published in the American Heart Association’s journal in 2022, for instance, found that exercising five to 10 hours a week was associated with a 26% to 31% lower risk of death from any cause than not exercising at all.
3. What will your sources of income be?
When you no longer get an annual salary,
you’re (hopefully) not saying goodbye to all of your income.
Consider other guaranteed income you may have in retirement. Pensions have gone by the wayside in recent years but some professions — teachers, government workers and hospital workers, to name a few — still rely on these retirement plans to help cover the cost of living in their later years. Annuities are other forms of income you may have.
4. How much will you have in retirement savings?
Once you’ve determined out how much you’ll likely spend for how long, and what your annual income will be, you can see the gap that needs to be covered with savings. This is where your money in retirement annuities and other employer-sponsored accounts comes in. Can this deficit be covered with your portfolio assets? If not, the goal should be to make plans now to save and meet your retirement goal.
A general rule used by financial advisors is that you should be able to have a 4% withdrawal rate for your retirement funds in the first year of retirement and then adjust for inflation with each withdrawal after that. In theory, that would allow you to avoid outliving your money over 30 years by not eroding your principal investment while maintaining the retirement lifestyle you want.
It’s always important to adjust your portfolio to make sure it aligns with your retirement goals and time horizons — but it’s especially important when you’re actually nearing retirement. Take the time to see how much risk you have in your portfolio, and if you’re invested aggressively in riskier assets, consider trading some of your stock portfolio out for less risky assets. Stocks are typically more volatile. In other words, you run the risk of losing money right when you’re about to start drawing down your accounts.
When you’re younger, time is your friend. You can have a bad year in the stock market but you have plenty of time on your side. It’s the exact opposite for retirees. They don’t have the luxury of time on the asset side.
If you fail to plan, you are planning to fail!
Consider other guaranteed income you may have in retirement. Pensions have gone by the wayside in recent years but some professions — teachers, government workers and hospital workers, to name a few — still rely on these retirement plans to help cover the cost of living in their later years. Annuities are other forms of income you may have.
4. How much will you have in retirement savings?
Once you’ve determined out how much you’ll likely spend for how long, and what your annual income will be, you can see the gap that needs to be covered with savings. This is where your money in retirement annuities and other employer-sponsored accounts comes in. Can this deficit be covered with your portfolio assets? If not, the goal should be to make plans now to save and meet your retirement goal.
A general rule used by financial advisors is that you should be able to have a 4% withdrawal rate for your retirement funds in the first year of retirement and then adjust for inflation with each withdrawal after that. In theory, that would allow you to avoid outliving your money over 30 years by not eroding your principal investment while maintaining the retirement lifestyle you want.
It’s always important to adjust your portfolio to make sure it aligns with your retirement goals and time horizons — but it’s especially important when you’re actually nearing retirement. Take the time to see how much risk you have in your portfolio, and if you’re invested aggressively in riskier assets, consider trading some of your stock portfolio out for less risky assets. Stocks are typically more volatile. In other words, you run the risk of losing money right when you’re about to start drawing down your accounts.
When you’re younger, time is your friend. You can have a bad year in the stock market but you have plenty of time on your side. It’s the exact opposite for retirees. They don’t have the luxury of time on the asset side.
If you fail to plan, you are planning to fail!