How much money you need to retire comfortably

It has become increasingly crucial for South Africans to start planning for retirement at a young age, with experts recommending saving twenty times your annual salary to retire comfortably.

According to the latest Baseline survey on financial literacy in South Africa, only 46% of adults tend to live for today rather than worry about retirement. 

Over 40% stated that they have not been actively saving for retirement, and a third of South Africans have no retirement plan.

Saving for retirement is a long-term financial strategy, and success hinges on generating real returns over time.

Ninety One completed an in-depth study into how investors should approach retirement income provision. 

The study emphasised that choosing the right starting income level is vital to investors managing their risk of running out of money. 

In short, a retiree should elect a starting income level of no more than 5% of their retirement capital. This is the amount they will draw down from their retirement investments. 

With this starting income level of 5% of retirement capital as your standard, you require a capital lump sum equal to 20 times your final salary to invest in an income-producing annuity on retirement. 

This is the amount required to generate an income equal to 100% of your final salary post-retirement. 

Drawing no more than 5% will likely provide you with an inflation-adjusted income for 30 years, ensuring a comfortable retirement. 

Paul Hutchinson from Ninety One explained that any delay in saving for retirement substantially impacts how much you need to save, affecting your current quality of life and how likely you are to achieve your retirement goal. 

For example, if you start saving for retirement at 20 years old, you would only need to save 15% of your pre-tax salary for 40 years to retire with 20 times your salary at 60. 

If you start saving at 30 years old, you would need to save 30% of your pre-tax salary every year to retire comfortably at 60. 

And if you start saving at 40 years of age, you would need to save an incredible 60% of your pre-tax salary to retire comfortably at 60. 

This is shown in the graph below, which outlines the respective share of your salary you need to save and for how long you must save to retire at 60 with 20 times your final salary.

Source: Ninety One

Hutchinson said it is also critical to know where you are along the path to this lump sum, as reaching your retirement goal is a journey that takes your entire working life. 

It is also crucial to be able to reevaluate your retirement savings and change how much you are saving and how it is invested. 

As you approach retirement, reducing risk and preserving capital is generally advisable.

Some general investment principles, such as diversification, are just as important as they are pre-retirement. 

Diversification can help protect your investments during market downturns and allow you to shift your investment focus away from appreciation to income generation. 

The following graph shows milestones you need to reach at particular ages that show you are on the path to a comfortable retirement. 

At 25, you should have saved at least one full annual salary. At 40, this should increase to five times your salary. At 50, you should have saved ten times your salary. 

This path will not hold for everyone as those who retire at 70, for example, might not require the entire amount of 20 times their income, as they would have worked for an additional three years and have fewer years remaining to spend their savings.