01 Feb 2019
Even mid-career, retirement may seem like a distant prospect, and not a high priority amid the busyness of day-to-day living. But retirement can be expensive, and the best way to be ready for it is to start early. So how do you know if you’re on track?
In order to retire with an income of around 75% of your final salary, you need to have saved roughly 15 times your annual salary (before tax) at the time you retire. To be on target for this amount, after working for about 10 years (or, around age 35) you should have saved roughly 2.5 times your annual salary (before tax); after working 20 years, (age 45) you should have saved about 5.5 times your annual salary; and by age 60, you should have saved around 12 times your annual salary.
With longevity increasing both worldwide and here in South Africa, the possibility of running out of income needs to be avoided. There are also other factors to consider when calculating whether you’ve saved enough: what kind of lifestyle do you want to maintain? Where do you plan to retire? The cost of living can vary greatly between different areas, and if your retirement plans include travel and other luxuries, then you need to have more saved than if all you want is a simple life. Will you have anyone depending on you for support? Do you plan to continue working? If you can put off accessing your retirement funds, you can further build your savings, while allowing the amount already saved to keep growing.
As you reach your later years, health becomes a more pressing concern. Treating illness and accidents can put pressure on your savings, so when planning for retirement it is a good idea to provide for such eventualities. (One possibility is to opt for cover that protects you in the event of illness or disability). Similarly, inflation and economic uncertainty can put your savings under strain.
In short: retirement can be expensive, and it is important to begin saving for it as early as possible. Not only does this give you time to accumulate more savings, but given more time, compound interest can generate a good return on your investment.
And, once you’ve started saving, keep it up. In the event that you change jobs, are retrenched or fired, don’t be tempted to eat into your accumulated nest egg. If you can no longer continue your membership in your employer’s retirement fund, consider moving your savings into a provident fund, which will safeguard your savings with tax benefits. For example, using Assupol’s preservation fund, your savings can stay invested with uninterrupted growth, and will not be taxed until retirement.
So, start as early as possible and avoid drawing on your retirement savings before you retire. Consistency will go a long way to insuring that you have enough to retire on when the time comes, and knowing that you are prepared brings great peace of mind.