Retirement Planning Part 1 – Setting the Scene

Retirement can seem far off for those in their 30’s and 40’s who are establishing themselves in careers and starting families and perhaps businesses, which may take their focus away from what are critical issues for safe-guarding their future financial well-being.

This often results in major deficits in income when one gets to retirement age and in particular in Africa this has become a major concern for much of our society.

In a typical retirement scenario in South Africa, someone or a couple, who has a paid-off property and vehicle that is suitable for retirement, will need to have around 3,8 Million in savings to ensure a 20 000 per month income after tax on interest.

In this scenario the lump sum invested has no draw-downs other than the interest so that the income remains constant as long as the interest rate maintains its average rate at 7%.

This basic cost break-down is based on basic costs of food, lower end medical aid or medical insurance cover, household and vehicle insurance cover and electricity and water costs per month per couple.

Inflation and Other Factors

There are of course inflationary issues that can affect this, such as higher rates and taxes and medical bills not covered by medical aid, that can have a significant impact on these amounts.

The provided figure of 20 000 income per month can be extrapolated into whatever level of income you are striving for:

For every additional R1000 a month income you want to achieve, you will require roughly 190 000 in additional investment calculated at an average return of 7% per annum. This is applicable up to a maximum income of 726 000 a year after which the tax rate increases (as per the South African Tax Services tax rate on retirement fund withdrawals).

How Much do you Need to Save?

As an indicator of what the savings required to achieve a total of R3,8 million saved by retirement, one would need to be investing around 3450 per month over a period of 20-years and increasing the amount saved by 6% each year.

As an illustration of how important compound interest over time is, you will only need to invest around 1050 per month over a 30-year period to achieve the same amount of savings.

So the old saying of “start early and keep saving” is certainly the key to all successful investments and savings towards a secure retirement plan.

All calculations as indicated above are based on Alan Gray’s online investment Calculator

But what happens When the Scenario is not a 20-30 Year Plan?

The same principal applies here but may also require a different strategy depending on how much you have to contribute towards your retirement savings, but the key is still to start now and don’t delay any further.

As a comparison, if you only have 10-years to retirement and are able to save 5000 a month, you will have a return of around 1 259 000 at retirement age. Still insufficient to meet monthly income needs but still a lot better than starting out later.

The strategies for people at different stages of work and income are varied and in Part 2, we will unpack some of the approaches and strategies needed for ensuring you have the best possible outcome for retirement.