The magic retirement numbers “5, 15 and 75” will give you a basic “ball park” amount that is needed to retire at 65 years old, which then should generate enough income for the next 30 years. But to ensure a more accurate outcome, you also need to consider taxation, different investment products and the best-suited investment strategy for you. Plus, add in estate planning for peace of mind.
The magic retirement numbers:
15 – you should save 15% of your income from the age of 23 until retirement at 65.
75 – at retirement you will require 75% of your final salary as income.
5 – you will draw 5% of your savings per annum in retirement as your income.
Sounds simple but a lot can go wrong:
It is paramount to start saving as soon as possible, as catching up is far more difficult than one expects. Saving 15% of your income assumes that your income will increase by 2% above inflation every year and that you will invest these savings into a growth asset that will grow on average at 6% above inflation until retirement.
Drawing down 75% of your final salary assumes as a retiree you will have less ‘regular’ expenditure, such as school fees, lower transport and housing costs, and less debt to service.
Drawing 5% of your savings is dependent on your savings growing on average at 4% above inflation per annum. The average balanced fund over the last five years has grown at only 5.8% p.a. This can be caught up, but it will need a lot of trust and commitment when one sees one’s plan “faltering”.
In retirement, a very volatile portfolio can fluctuate your drawdowns and can put pressure on your regular spending habits.
It’s also important to consider the possibility of you outliving your 30-year retirement period. This may sound like a bonus and is becoming more likely with a far higher aging population, but financially, this is a risk.
Keeping up with inflation remains an ongoing concern. Your investments need to grow 4% above inflation per annum in order for your monthly drawings to increase at the same rate as inflation.
Stacking the numbers up (a basic example):
Monthly income after tax requirement at 65 years old: R30 000 (to increase with inflation)
This will require a monthly drawdown before tax of approximately R38 000, which at 75% means your final salary was around R51 000 per month.
Therefore, to draw this income at retirement you would need R9.2m of savings to invest that will need to grow at 4% above inflation for the next 30 years.
Other important issues to consider to ensure you have enough income at retirement:
- Ensure you have an investment strategy that will provide the necessary inflation +4% and most importantly takes into account your risk tolerance. This requires a properly structured investment portfolio that should provide the best risk-adjusted returns to suit you.
- Ensure you are invested in the most tax-effective product or combination of products, such as living annuities, endowments or discretionary investment portfolios. This could result in lower taxes and far more income over time.
- Ensure your retirement savings plan is monitored and adjusted when necessary to ensure that you stay on course to retirement and thereafter. This is crucial.
- Start saving sooner than later. It is always better to focus on how much should be saved as opposed to how much less to draw as income when retired.
- Try and draw down less at the beginning of retirement. This will allow your initial capital to grow more, giving you a safety buffer for later years.
- Consider the effectiveness of your estate planning. This can provide important peace of mind for your family or dependants.
We recommend you speak with one of our qualified financial planners to assist you with your retirement plan, which could make a significant difference to meeting your desired retirement goals.
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