Saving for retirement is an important subject addressed again by Allan Gray. A well researched rule of thumb is that a retirement income equal to 75% of your final salary just before you retire will allow you to live comfortably in retirement. The lower amount (75%) accounts for lower housing and higher medical costs in retirement.
This 75% annual amount needs to equate to a 4% withdrawal of your savings at retirement. As an example, if your final monthly salary was R50,000 – 75% annually would be R450,000 and for this to be a 4% annual withdrawal, your retirement saving should be R11,250,000.
This equation is based on increasing your income by inflation and structuring your savings portfolio appropriately. Then there is a high likelihood your retirement income could last 30 years.
So how much should you save a month for retirement?
A rule of thumb has been 15% of your income should be saved monthly, based on government tax-breaks into approved retirement funds. This is too low to reach the recommended 75% level for retirement.
The minimum saving level is 17% for 40 years (from 25 to 65 years old). If you save for a shorter period of time this percent increases sharply. See table in the Allan Gray article.
If you cannot save enough, adjustments are necessary:
- Delay retirement to give your investment more time to grow
- Decrease your retirement income needs by re-thinking your life style
- If you get additional income allocate it rather to your retirement savings
Having the right amount of income at retirement is important. Get advice from a good independent adviser. Click here to request a consultant to phone you.
Click here for the full Allan Gray article.
Click here for a free analysis of your existing retirement savings.
